MEPs home in on financial speculators

Have you ever wondered how it is possible for a small group of speculators to make money while the financial system teeters on the brink of disaster and taxpayers' money is being used to shore it up? By short selling and using financial instruments like derivatives, investors can profit from falling markets, but these practices facilitate excessive risk taking, one of the main causes of the current crisis. That is why MEPs want to rein them in. 

On Monday Parliament will debate two reports containing measures to increase transparency on financial markets: French Green Pascal Canfin's report on short selling and credit default swaps (CDS) and German Christian Democrat Werner Langen's report on derivatives.
Short selling allows an investor to profit from falling prices by for example borrowing shares to sell based on the expectation the price will fall, at which point the investor buys them back and pockets the difference.
CDS are a form of insurance against default. If an owner of company or government bonds is concerned about default, they can buy CDS through which they will be reimbursed in the event of a default. If there is no default the investor simply loses the cost of the CDS.

Why the Parliament wants to ban naked short selling, naked CDS
Naked short selling is the sale of shares you don't actually own. The Canfin report would allow such transactions only in cases where the short seller is able to reliably demonstrate by the end of the trading day that they can come up with the shares.
Investors sometimes buy CDS even if they don't own the underlying bonds. That means they get paid, if a government defaults, even if they don't own the government bonds. This has been likened to taking out insurance on your neighbour's house and then hoping it burns down so you can collect the insurance. MEPs think this destabilizes the markets and want to ban the practice for EU member state bonds.
Over the counter (OTC) derivatives to be forced on central clearing
The Langen report deals with derivatives, i.e. financial instruments that allow investors to profit from movements in stock and bond prices, interest rates and currency exchange rates. Derivatives can be thought of as contracts between two counterparties: when prices move, one of them has to pay the other, depending on which of the counterparties placed the right bet.
Usually these contracts are entered into over-the-counter (OTC): counterparties agree between themselves how to structure the derivative. There is very little transparency. If things go wrong, nobody knows exactly how much risk there is in the system, which can lead to panic and instability that can seriously damage the functioning of financial system.
The Langen report calls for OTC derivatives be cleared centrally via central clearing parties, CCPs - financial institutions that step in between the counterparties and make sure derivatives contracts are settled. Data about the trades would be communicated to trade repositories so that regulators can gauge the amount of risk in derivatives market and react accordingly.
Negotiations on these issues are still going on with member states.
Source http://www.europarl.europa.eu/en/