As the euro tumbles and speculators bet on the demise of government borrowing, and particularly Greek bonds, EU lawmakers believe Brussels now has more ammunition to crack down on markets. Tomorrow (23 February), EU regulators will announce new rules on short-selling, say sources close to the authorities.
As part of a new breed of financial damage limitation coming out of Brussels, the Committee of European Securities Regulators (CESR) confirmed that this week it will issue a report that will form the backbone of EU rules on short-selling.
The new rules will force institutions involved in short-selling to tell the market and regulators when their positions exceed 0.5% of share capital, according to lawyers in the City of London and sources close to the regulators.
That is, if a trader or group of traders sells 5,000 out of a million shares before any purchases of those shares have even been made – so called 'short-selling' - they will have to notify markets to ensure that traders on the opposite side of a deal know what they are betting against.
Regulators push for thresholds
In a consultation, the CESR had asked banking authorities and federations whether a threshold of 0.1% would do the trick.
The majority of those consulted agreed that such a low threshold would trigger more frequent notifications and add to the burden and the cost of reporting.
Regulators have been heaping pressure on Brussels to introduce the same disclosure requirements across the 27-member bloc, as current discrepancies are costing markets both time and money.
A spokesperson for the European Commission confirmed that the institution will take heed of the CESR report and said the EU executive may launch its own consultation this summer.
Sources who did not wish to be named told EurActiv that regulators may introduce the disclosure threshold themselves for fear of delays in drafting policy at the European Commission.
The CESR rules are a downgraded version of tougher measures in France, Britain and Germany, such as partial and fully fledged bans on short-selling. Since the bans expired, France is the only country to have introduced an extension.
The UK's Financial Services Authority introduced a disclosure threshold of 0.25% when its ban expired early last year.
Speculators 'attacking euro'
Short-selling's bad reputation did not suddenly arrive as a result of the 2008 crash in financial markets. The Wall Street crash in 1929 and subsequent crashes, in particular Asia's regional crisis in the 1990s, all produced strict but temporary restrictions on short-selling.
In 1995 Malaysia's finance ministry even allegedly wanted to introduce caning as a punishment for short-selling.
Though there is no talk of corporal punishment in Brussels, officials are beginning to blame speculators for driving down the euro, which has been at an eight-month low against the dollar.
Speculators are "deliberately attacking the euro," according to Robert Goebbels (S&D, LU), one of many MEPs drafting upcoming legislation on hedge funds.
Hedge funds, some of which are notorious short-sellers, will be upset by the EU's new disclosure rules as they appear to double up on similar rules in a controversial Alternative Investment Fund Managers Directive (AIFMD), dubbed protectionist by industry lobbies.
MEPs are expected to vote on the AIFMD in April once parliamentarians have sifted through a record 1,600 amendments to the text.
- 23 Feb: CESR to publish report on short-selling disclosure rules.
- Summer 2010: European Commission consultation on short-selling disclosure rules.