By Huw Jones and John O'Donnell
LONDON/BRUSSELS - (Reuters) - Top officials warned policymakers on Wednesday to avoid hurting global efforts to toughen up financial regulation as differences emerge over derivatives speculation, hedge funds and bank capital.
"We all sit in the same boat," Financial Stability Board Chairman Mario Draghi told a European Parliament hearing.
"We want to retain a globally integrated financial market. That is a prerequisite for stability and growth," Draghi said.
European Union financial services chief Michel Barnier told the same audience he will propose controls on certain government debt derivatives to clamp down on speculation.
Top U.S. derivatives regulator, Gary Gensler, told the same forum on Tuesday that a ban on some types of credit default swaps won't work.
Critics say if the EU introduced a ban on some credit default swaps trading, the market would simply shift to Wall Street to avoid the curbs.
Janet Cohen, a member of Britain's upper parliamentary chamber, said Britain, the EU's main derivatives center. and Europe as a whole would lose out from restrictive rules.
"I fear the Commission proposal on derivatives may not jive with what's being arrived at globally," Cohen said.
REGULATORY ARBITRAGE
The G20 group of leading countries pledged last year to coordinate new regulation for derivatives, hedge funds and bank capital so that financial institutions avoid ending up with a repeat of the worst crisis since the Great Depression.
Draghi's FSB has been tasked to implement those pledges but countries are already taking unilateral action -- Britain on taxing bonuses, Europe on CDS contracts, the United States on banning proprietary trading.
International Monetary Fund Managing Director Dominique Strauss-Kahn told EU lawmakers the worst of the crisis has receded but there was a risk that a chance to create a new financial system may vanish.
"If we don't go fast enough at the global level, what will happen is that countries begin to solve problems at the country level," Strauss-Kahn said.
"They may propose different kinds of reform. The risk is uncoordinated policy, distorted capital flows and regulatory arbitrage. This challenge is what we are facing now," he said.
Apart from derivatives, differences have also emerged over hedge funds and bank capital in the past week.
EU finance ministers delayed agreeing tough new bloc-wide regulation of hedge funds on Tuesday after opposition from Britain, home to 80 percent of the industry in Europe.
It also followed complaints from U.S. Treasury Secretary Timothy Geithner who said the rules would discriminate against hedge funds from the United States.
Efforts to agree on a global tax or levy on banks to pay for bailouts are also facing an uphill battle with Strauss-Kahn on Wednesday effectively ruling out a so-called Tobin tax on financial transactions.
BASEL III TOO SEVERE
A global set of draft reforms to beef up bank capital and liquidity requirements so that taxpayer bailouts are less likely in future, came under attack from France on Wednesday.
The Basel Committee of central bankers and supervisors from the G20 countries put forward the reforms in December to be implemented by the end of 2012.
"Their recommendations on liquidity and capital are severe and taken together, risk seriously threatening the financing of the economy," French Economy Minister Christine Lagarde told Les Echos daily.
Other countries are unhappy with Basel's plans to cap bank leverage and Draghi sought to head off complaints.
"It's clear there are pressures that want to dilute the rigor and credibility of standards that have been agreed," Draghi said.
"But there is one area where we have to have exactly the same rules everywhere, in capital and liquidity regulation. That is maximum harmonization area," Draghi said.
Basel was on track and there will be an "appropriately long grandfathering" time for making changes that toughen up the quality of capital banks must hold so that economic recovery is not harmed, Draghi added.
The FSB is due to come out with global proposals by November on how to deal with "too big to fail" banks so they don't assume a bailout by taxpayers again when in trouble.
The United States, however, stunned and confused policymakers around the world earlier this year by proposing to ban proprietary trading at deposit-taking banks -- a far more radical solution than hitherto pledged by the G20.
Draghi sought to play down the U.S. move, saying "we should not expect a silver bullet for all instances" and that national solutions were likely on the "too big to fail" question.
"We should not overstress this potential lack of coordination," Draghi said.
But Strauss-Kahn cautioned that pending any global agreement "we have a system with holes and go it alone national approaches."
(Writing by Huw Jones, editing by Stephen Nisbet)
