More CDS news from Europe

Q+A-How the EU is waging war on speculators

BRUSSELS, May 18 (Reuters) - European Union finance ministers backed tough new rules for hedge funds and private equity groups on Tuesday, marking a political defeat for Britain and paving the way for other financial reforms.

WHO ARE THE SPECULATORS EUROPE WANTS TO STOP?

Political leaders single out hedge funds as the culprits for snapping up default insurance on Greek debt, exacerbating borrowing problems and forcing European neighbours to agree a $1 trillion rescue package for weaker states.

They believe such buying exaggerated a price spiral of this insurance -- credit default swaps -- which was already rising in cost amid fears Greece could go bankrupt.

This in turn aggravating Athens' attempts to borrow money on the open market, forcing them to turn to their European neighbours for help and triggering fears problems could spread elsewhere.

In particular, politicians denounced the buying of CDS by speculators who do not own the bond it insures.

HOW WILL NEW EUROPEAN RULES CHANGE HEDGE FUNDS?

The new law, which first needs the blessing of parliament and European countries, will open a new chapter for hedge funds by forcing them to reveal closely-guarded information about their investments and borrowings to supervisors.

It also gives the authorities -- under the eye of a new pan-European super watchdog -- the power to intervene by imposing borrowing limits on a hedge fund that it fears is taking risky gambles.

The new regime also imposes loose rules on how managers should be paid, demanding that pay is staggered over a number of years to prevent risk-taking for a big bonus.

The most controversial part of the draft law is that it would not give foreign funds a licence to do business across all 27 countries in the European Union.

Private equity groups too, many of whom borrowed heavily in the run up the crash to pay for multi-billion-euro company takeovers, will also be subject to stricter monitoring.

HOW WILL THE EU CURB THOSE WHO BET AGAINST STRUGGLING STATES LIKE GREECE?

Michel Barnier, the European commissioner in charge of an overhaul of financial services, will outline in June proposals to regulate trading of the derivatives that are often blamed for market price swings.

It would be the first rules for trading in instruments whose value is linked to an asset such as currency, a market which ballooned to roughly $600 trillion.

Barnier may propose capping the size of individual trades, giving watchdogs the power to police big deals in derivatives such as Greek debt default insurance.

Under a model which would resemble the approach in Washington, traders could be stopped from building up a large position that could let them swing prices in anything from oil to currency in their favour.

The new regime is also likely to demand the recording of derivative trades and gradually push the market onto exchanges or central warehouses and under the close watch of supervisors.

Greek Prime Minister George Papandreou has raised the prospect of banning this type of trading but Barnier is unlikely to do this.

WILL NEW EUROPEAN WATCHDOGS HAVE ENOUGH CLOUT?

Many experts believe the success of the EU's financial reform hinges on the strength of the new watchdogs being set up to police banks, insurers and markets.

As with hedge funds, Britain has fought hard to water down the watchdog's influence, and won a veto that could be used to overrule them. But parliament is fighting back, demanding the watchdogs get more clout.

They propose giving more direct powers to the supervisors which means they could overrule national watchdogs like Britain's Financial Services Authority in telling international banks in London such as HSBC what to do.

WHAT OTHER RULES COULD PUT A BRAKE ON RUNAWAY MARKETS?

Alongside a host of rules that span placing limits on banker pay to demand that lenders set aside more capital to cover the risk of recession, the European Commission is also examining curbs on credit rating agencies.

Germany to ban naked CDS shorting?

Stronger CDS Regulation will trigger a U.S. dollar rally and global recession


So said Liu Junluo. Go back and read it.

Here's Reuters: Germany to ban certain short-selling -coalition source

FT Alphaville says the ban will apply to CDS.

Euro ist kaputt.

The ban on short-selling financial stocks in the U.S. came in September 2008. I don't know what is going to happen, but given the May 6 crash and guys like Richard Russell are saying:

Do your friends a favor. Tell them to "batten down the hatches" because there's a HARD RAIN coming. Tell them to get out of debt and sell anything they can sell (and don't need) in order to get liquid. Tell them that Richard Russell says that by the end of this year they won't recognize the country. They'll retort, "How the dickens does Russell know -- who told him?" Tell them the stock market told him.

And I ask myself, "Am I seeing things? The April 26 high for the Dow
was 11205.03. The Dow is selling as write at 10557 down 648 points
from its April high. If business is even better than expected, then
why is the Dow down over 600 points? And why, if there were 674 new
highs on the NYSE on April 26, were there only 20 new highs on Friday,
May 14? And if my PTI was 6133 on April 26, why is it down 17 points
since its April high?

The fact is that I've been seeing deterioration in the stock market
ever since early-April, and this in the face of improving business
news. The D-J Industrial Average is composed of 30 internationally
known top-quality blue-chip stocks. These are 30 of "America's biggest
companies." If Barron's is so bullish on the future of America's
biggest companies, then why isn't the Dow advancing to new highs?

Clearly something is wrong. But what could it be? Much as I love
Barron's, I trust the stock market more. If I read the stock market
correctly, it's telling me that there is a surprise ahead. And that
surprise will be a reversal to the downside for the economy, plus a
collection of other troubles ahead.

About Dow Theory -- First, we saw the recent April highs in the
Averages. Then we saw a plunge in both Averages to their May 7 lows --
Industrials to 10380.43, Transports to 4298.12, next a short rally. If
ahead, the two Averages turn down and violate their May 7 lows, that
would be the clincher. Such action would signal the certain resumption
of the primary bear market.

Just as for years I asked, cajoled, insisted, threatened, demanded,
that my subscribers buy gold, I am now insisting, demanding, begging
my subscribers to get OUT of stocks (including C and BYD, but not
including golds) and get into cash or gold (bullion if possible). If
the two Averages violate their May 7 lows, I see a major crash as the
outcome. Pul - leeze, get out of stocks now, and I don't give a damn
whether you have paper losses or paper profits!

Could a major rally in the U.S. dollar, decline in stocks be on the way?

Many people will jump from tall buildings

Liu Jun Luo called it two months ago...

Stronger CDS Regulation will trigger a U.S. dollar rally and global recession - 刘军洛

In May 2010, Greece will face nearly $30 billion of debt financing. And in June 2010 at the G20 meeting, EU and Greek officials hope to strengthen oversight of financial derivatives. In a couple of months we'll be in May and June, and if the U.S. dollar strongly appreciates, many people in the world will jump from tall buildings.

German gov't wants the power to break up the banks

Schwarz-Gelb will Großbanken notfalls zerschlagen
Black-yellow want to destroy the big banks, if necessary
Black-yellow is the current ruling coalition government. The second link goes to a Google translation of the German article.

Long story short, the German government wants the ability to break up banks even against the will of shareholders. This would allow the government to break off the insolvent pieces of a bank. The more free-market oriented FDP want more of the cost of cost of failed banks to fall on the shareholders and creditors, rather than taxpayers.

Given that the Germans have basically said they are opposed to a bailout for Greece, it's important to remember this story:
Ackermann warns of a bankrupt state of Greece

Josef Ackermann, if necessary, calls for a rescue Greece. German banks had considerable billion under fire over the heavily indebted country, "said the CEO of Deutsche Bank, excluding those of his own institute, however. "If we do not get stabilized Greece, the banks have the next problem," Ackermann warned on Wednesday evening.

On the plus side, he does say that CDS are not the problem. As Liu Junluo points out, banning CDS would not be good for the markets.