Commodity exchanges, like the Chicago Board of Trade, place limits on the number of contracts a firm can hold. USAToday reports that the Securities and Exchange Commission has proposed similar caps on derivatives markets.

The proposal would limit firms that trade derivatives to 20% of the clearinghouses, exchanges and other trading venues. Banks that trade derivatives are now subject to new requirements for holding capital reserves as a cushion against loss.

The derivatives market is massive -- a $600 trillion market worldwide. In the U.S., five big banks -- Bank of America (BAC), Citigroup (C), Goldman Sachs (GS), JPMorgan Chase (JPM), and Wells Frago (WFC) -- account for 97% of the total derivatives held by the U.S. banking industry.

So the European Union's 27-nation bloc is setting new rules for short selling and derivatives trading. The European Commission set up the European Securities and Market Authority to police European markets.

Michel Barnier, European Union commissioner in charge of reform said: "Today we are proposing rules -- so we know who is doing what and who owes what to who."

For the past few weeks we've been hearing cries from Europe concerning how to regulate or ban derivatives trading. Now the word has crossed the pond and we are hearing the same complaints here in the U.S.

We have a parade of regulators who want to do something about derivatives trading. First we heard from Gary Gensler, chairman of the Commodity Futures Trading Commission, who said: "Standard credit default swaps and other privately traded, over-the-counter derivatives need drastic reform." He went on to say: "The only parties that benefit from a lack of transparency are Wall Street dealers."

Reuters reports that derivatives traders have opened an emergency trading session this afternoon to settle a variety of derivatives trades involving Lehman Brothers Holdings Inc. (NYSE: LEH). As I posted earlier today, I think the most likely option for Lehman is a bankruptcy filing by the end of the day today. And these derivatives trades are intended to minimize the losses to a bankruptcy filing. To that end, the trades conducted this afternoon will expire if Lehman has not filed for bankruptcy by midnight tonight.

The emergency trading session will last for two hours this afternoon. Reuters writes, "The session will run from 2 p.m. to 4 p.m. and will involve credit, equity, rates, foreign exchange and commodity derivatives. The aim is to reduce risk associated with a potential bankruptcy filing by Lehman. Trades are contingent on a bankruptcy filing at or before 11:59 p.m. New York time Sunday. If there is no filing, the trades cease to exist."

I endorse this idea because it looks to me like a prudent move that would minimize the damage of a Lehman bankruptcy filing. I wish I knew how much such a filing would cost Lehman's stakeholders or how much this emergency session will limit its damage. Unfortunately, I don't know. Even if Lehman does not file for bankruptcy, this emergency session looks worthwhile because it won't cost much to conduct and if there is no need for it, the trades will expire worthless.

So far, Europe has lagged behind the United States in terms of exorbitant compensation being heaped on top corporate executives.

But Porsche CEO Wendelin Wiedeking's $100.2 million pay package is sparking controversy in Germany. I consider myself a big supporter of strong corporate governance, but a big pay package isn't a problem by itself; it's only a problem when it is completely out of line with the fundamental growth of the company.

At Porsche, that may be the case. According to the Wall Street Journal (subscription required), "In its most recent financial statement, Porsche disclosed that it made more money in its latest fiscal year from trading derivatives than it did from selling cars. It said earnings from stock-option transactions contributed a pretax €3.59 billion to the overall result."

Here's the problem: Trading derivatives for big profits can be hugely risky, and profitability can be fleeting in a way that operational growth (e.g., selling cars) isn't. Paying executives huge bonuses for gambles that paid off is bad for two reasons: First, it's completely unwarranted (Maybe they just got lucky) and, secondly, it can encourage rampant speculation. They're playing with shareholders' money for a chance at big profits. If they lose big next year, they probably get fired -- but hey, he just made $100 million!

Maybe the company isn't taking big risks with derivatives trading, but I seriously doubt it; as Long Term Capital Management and the Orange County crisis taught us, big rewards in derivatives generally come with big risk, even if it isn't apparent when the money is rolling in.