European Union plans to crack down on abusive trading linked to sovereign debt face gridlock as several countries oppose intervening in government bond markets and some EU lawmakers want tougher action.
The changes envisaged in a draft European Union law aim to inject transparency and to put curbs on shortselling of shares and the way insurance-like derivatives contracts called credit default swaps (CDS) are traded.
Policymakers say hedge funds have used CDS contracts based on sovereign debt to bet on a fall in the price of a government's bonds.
They say this worsened the plight of Greece when the EU was putting together a package to bail out the country this year.
Hedge funds argue the CDS market is far too small to influence the much larger sovereign debt market which is under pressure because of huge public deficits.
EU finance ministers are due to review progress on approving the draft law when they meet next Tuesday.
After three meetings of their working group there are still fundamental divisions over the measure.
"Some delegations strongly oppose the inclusion of sovereign debt instruments in the scope of this regulation," a paper prepared by EU president Belgium for the meeting said.
No country is named but Britain, Europe's biggest derivatives trading centre, is seen as opposing such intervention in government debt markets.
"They consider that there is no evidence of the need to regulate the sovereign debt market and that these rules might be detrimental to the functioning and liquidity of this market," it added.
EU states and the European Parliament have the final say on the measure and must therefore reach a joint deal.
Pascal Canfin, the parliamentarian who is sponsoring the measure, said this week it should go further and ban naked selling of CDS contracts outright.
This refers to when the buyer does not own the underlying government bond that is being "insured" against default.
EU states are also split over forcing trading venues to flag short-selling orders and publish daily summaries of short orders.
The measure also introduces sanctions for traders who fail to settle a stock trade on time.
The aim is to curb short selling of shares - or betting their price will fall - where the investor has made no arrangements to borrow the stock when it comes to settlement.
Some EU states say there is a lack of evidence that late settlement is due to short-selling.
The draft measure also gives emergency powers to the new European Securities and Markets Authority (ESMA), a pan-EU regulator that will start operating in January.
Some states believe that giving ESMA powers to override a national supervisor goes to far, especially when it comes to sovereign debt markets, the document said.
Reuters