"Negotiations ended with no progress and further division among the parties," said a source from the European Parliament, describing the last round of talks which took place on Tuesday (20 September) between representatives of all three EU institutions.
The so-called 'trialogue' negotiations are being held between the European Parliament and EU member state representatives under the Commission's watch.
"Positions are so distant that the next meeting, which was supposed to take place next week in Strasbourg, has been cancelled," the source added.
The bone of contention is trade in so-called naked sovereign credit default swaps (CDS), which are used as a kind of insurance policy against a potential default of government bonds. Naked or uncovered CDSs are insurances on assets that are not owned by the seller.
In simple terms, a naked CDS contract is typically a bet taken by investment firms like hedge funds that the bond's issuer will end up in trouble. Sovereign CDS are applied to government bonds.
With the ongoing turmoil in eurozone bond markets and huge spreads between yields of German bonds and securities of countries like Greece, Ireland Portugal, Italy, Spain and Belgium, the Parliament is keen to ban naked sovereign CDSs.
MEPs see a risk of moral hazard in the sale of insurance products of bonds that are not owned. "You are unlikely to call the fireman if you see fire in the house for which you have an insurance but that you do not own," goes the Parliament's argument.
The case for maintaining naked CDSs
This anti-CDS position is backed by a handful of member states, including Germany which has already banned naked short selling.
However, a majority of member states in the EU Council of Ministers favour a softer approach, including Italy whose huge public debt has recently come under attack from speculators.
"Banning naked credit default swaps would have a negative impact on pricing government bonds and can eventually drive up the price of refinancing national debts," an Italian diplomat told EurActiv.
This line is followed by the UK, the Netherlands and Poland which are the most vehement opponents of a ban on naked sovereign CDSs.
Second reading in Parliament?
Negotiations to find a compromise collapsed earlier this year, after a first reading in the European Parliament.
"As things stand now, it is likely that there will be a second reading" in the European assembly, said a Parliament official following the dossier, meaning that the final approval of the regulation on short selling will be further delayed.
"But new attempts will be made in the coming weeks to avoid this option," the official added.
A participant to the trialogue talks told EurActiv that a dividing line might emerge among MEPs who have so far been united against the soft regulation approach adopted by member states.
The centre-right European People's Party, the biggest political group in Parliament, is considering taking the controversial naked sovereign CDS dossier out of a broader package of financial regulations, allowing other legislative texts to be adopted while talks continue.
However, Socialists and Greens oppose this line.