EU mulls restrictions on short-selling


The European Commission yesterday (14 June) said it wants to give market supervisors the authority to either ban or restrict short-selling and credit default swaps but disagreement is still rife on whether the EU or national authorities should be in charge. 

The European Commission launched a consultation yesterday on what shape new EU rules to regulate short-selling and credit default swaps (CDS) should take, just days after France and Germany heaped pressure on the EU executive to consider an EU-wide ban of the practices (EURACTIV 09/06/10).

The paper presents several options, some of which will likely cause disagreement between the EU's biggest partners – the UK, France and Germany.

Most controversially the EU wants supervisors to have "the power to temporarily restrict or ban short-selling and Credit Default Swaps in emergency situations".

In addition, the new laws, which are due to be unveiled on 8 September, will include requirements to increase transparency about companies' short positions, including those gained via derivatives contracts.

Turf wars

But which authority will decide whether or not there is an emergency situation is at the centre of a row between the European Commission, the European Parliament and the EU's finance ministers.

EU legislators, including the European Parliament and the Commission, would prefer to see these powers conferred to Brussels, while member states, most notably the UK, would prefer these decisions be made at a national level.

"We cannot take the luxury of a week to make a decision," a Commission source said, criticising the possibility of member states trying to reach a common position when there are new Brussels-based regulators in the making to do that for them.

"It would be clumsy if the Council were to decide," the source added.

The Commission source said the EU executive would likely try to use the European Securities and Markets Authority, a proposed Brussels-based regulator, to replace the Committee of European Securities Regulators and enforce bans if there was a disagreement to do so at a national level.

Some countries have already pursed temporary bans while others, like Spain, Portugal, Luxembourg, Greece, Belgium and Austria, have expressed support for a ban on naked short selling, the Commission source said.

In May, Germany enforced a total ban on naked short selling, while France opted for a temporary ban on some kinds of naked short selling.

The UK does not see the need for a ban or any restrictions on short selling, naked or otherwise, a source confirmed.

"If there is evidence of market manipulation, we would look carefully at the situation but at the moment evidence is thin on the ground for a ban on short selling," the source said.

This week, the Commission also kicks off its public consultation on a sweeping derivatives crackdown with companies already warning that hedging risks could be harder under the new rules (EURACTIV 09/06/10).

The European Commission said on 9 March that it would consider banning 'naked' selling of derivatives contracts and Greece said curbs on speculators would be examined by the G20 powers (EURACTIV 10/03/10).

The measure was prompted by the dire economic situation of EU member Greece. European Commission President José Manuel Barroso said the EU executive would like the G20 to discuss speculation in credit default swaps (CDS), a form of insurance against default. Some EU politicians accuse speculators of using these complex financial instruments to bet on a Greek bond default.

So-called 'naked' selling involves selling a CDS to a buyer who does not hold the underlying sovereign bond. 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.

Short-selling happens when assets are borrowed, sold and then bought back in order to profit from the difference between the original price and the price when the assets are repurchased.

On 19 May, Germany became the first European country to ban naked short-selling in shares of the country's 10 most important financial institutions (EURACTIV 19/05/10).

In June, Nicolas Sarkozy and Angela Merkel, leaders of France and Germany respectively, asked Commission President Barroso to consider an outright ban on naked short selling and credit default swaps (EURACTIV 09/06/10).

  • 10 July: Commission to close consultations on short selling and derivatives.
  • 8 Sept.: Commission to propose legislation to regulate short selling and credit default swaps.

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