To European officials, financial derivatives are dangerous weapons that worsened Greece's debt crisis and should be curbed. To Wall Street, they're tools that reduce risk and generate profits and should be left alone. Now, regulators on both sides of the Atlantic are trying to figure out who's right and what to do about it. At stake are billions in profits that banks say would be threatened by too much regulation. Yet supporters of tougher rules say the global financial system is at risk as long as derivatives remain largely unregulated. Derivatives are instruments whose value depends on an underlying asset, such as mortgages or stocks. They can help hedge risks. But derivatives can also produce steep losses, or huge profits, if the value of their underlying asset sinks. European officials say some derivatives are too harmful to be left alone. They warn they may ban some credit default swaps, a type of derivative that insures debt. In a visit to Washington this week, Greece's prime minister argued that speculators were using the swaps to bet against his country's debt. He said this has escalated Greece's borrowing costs, making it harder to dig out of its debt crisis. The European Commission on Tuesday threatened to ban speculative trading of credit default swaps by investors who don't actually own a country's underlying debt. These are called “naked” trades. German Chancellor Angela Merkel called on the US to curb such trades. But US regulators have resisted such calls. They favor only regulating the products, not curtailing them. In Asia, some local regulators have expressed support for tighter oversight of derivatives markets, though there have been no sweeping changes. Coordination of any derivatives regulation is vital. Unless rules in the United States, Europe and Asia are synchronized, global traders inevitably would shift to wherever the most lenient rules exist. Some experts think Asia, including financial hubs like Hong Kong and Singapore, for example, could attract more business if it maintained looser regulation. The regulatory conflict comes days before the expected unveiling of a bill to overhaul the US financial system. Sen. Christopher Dodd, D-Conn., the Banking Committee chairman overseeing the legislation, wants more transparency in derivatives markets.His bill is expected to require most derivatives trades to pass through clearinghouses so transactions would be done more openly. Such transactions are now largely traded among financial institutions with little transparency or regulatory oversight. Critics say this can lead to abusive and dangerous behavior.
