Commission bids to bring security to short-selling

Plan to curb national regulators’ powers and ‘naked’ short-selling would face restrictions.

The European Commission will on 15 September put forward a proposal constraining the ability of national regulators to ban the short-selling of financial instruments.

It wants to avoid a repeat of events in May, when a surprise decision by Germany to impose a temporary ban on certain forms of the trading practice exacerbated anxiety on the financial markets at the height of the eurozone’s debt crisis.

The Commission will, however, seek to assuage concerns in some member states, notably France and Germany, that short-selling – which involves the buying and selling of borrowed securities – itself causes instability.

Michel Barnier, the European commissioner for the internal market, will propose that the Commission would be given power to define the market conditions in which member states would be allowed to introduce bans on short-selling. These conditions would be presented in the form of a delegated act, which would become law unless the Council of Ministers and the European Parliament raise objections within two months.

Click Here: cheap nrl jerseys

Justified bans

Before introducing bans, national regulators would be obliged to give notice to their counterparts. The European Securities and Markets Authority (ESMA), a new EU supervisory body that will start work on 1 January 2011, would then assess whether the proposed ban was justified, and report its findings to member states. In extreme circumstances, the ESMA itself would be able to introduce pan-European bans.

While limiting national regulators’ freedom of action, Barnier also wants to impose severe restrictions on ‘naked’ short-selling, the specific subject of the German ban.

In normal short-selling, a trader borrows a security (usually a bond or a share) and arranges to sell it on the basis that he will later purchase an identical security to return to the lender. The trade becomes ‘naked’ when the trader arranges a sale without ensuring in advance that the security can be borrowed.

Market instability

Regulators have expressed concerns that naked short-selling can fuel market instability, as there is a risk that traders will not be able to complete their trades. They also contend that it can lead to price volatility, as naked short-sellers can potentially agree to an infinite number of trades.

Barnier will propose that traders who sell short should be required to make some kind of arrangement to borrow a security before agreeing to sell it. They would not, however, have to have entered into an explicit agreement to borrow.

The draft legislation being prepared by the Commission will also include two financial thresholds above which firms and funds would be required to disclose short positions, firstly to regulators, then, above a higher threshold, to the market.