Big Banks Face Fraud Charges in Italy

The global crackdown on derivatives keeps on growing. In the latest twist, a court in Milan has ordered four banks and 13 individuals to stand trial on fraud charges stemming from the city's $2.32 billion bond issue in 2005.

The banks, including JPMorgan Chase, UBS, Deutsche Bank, and Depfa of Germany, were involved in a deal in which interest rate swaps reduced the city's apparent debt load by exchanging fixed rates of interest of variable ones. The issues appear to be similar to Goldman Sachs' use of currency derivatives to help make Greece's debt load look lighter. The Milan case, the first of its kind, is a test. If the May 6 trial produces convictions, similar charges could be brought around the world, including in the U.S. All four banks have denied any wrongdoing.

Regulators around the world are pressing for tighter controls on derivatives, securities that are based on the value of other securities. The European Union wants to ban the use of certain kinds of derivatives by pure speculators, who don't own the underlying security tied to the derivative, and are essentially just betting on whether the value of the derivatives will rise or fall. And in the U.S., pending legislation would force many kinds of derivatives sales onto clearing houses, so that prices would be made public and losses would be shared by groups of banks and traders, reducing the risk of a public bailout.