Commission seeks to allay fears over short-selling

Proposals aim to reveal abusive activities.

The European Commission is on 15 September to publish proposals to harmonise the regulation of short-selling on the EU’s financial markets.

Several member states, including France, Germany, Greece and Luxembourg, have accused traders of exacerbating the EU’s sovereign-debt crisis by short-selling and have urged the Commission to act.

Michel Barnier, the European commissioner for the internal market, is hoping that his proposal will satisfy member states’ concerns and prevent a repeat of the financial instability that followed a surprise decision by Germany, in May, to restrict short-selling on its market.

Short-selling occurs when a trader sells a financial instrument (eg, a corporate share or government bond) that he does not own but borrows, with the intention of buying back an identical instrument at a later point in time at a cheaper price. Traders use short-selling to hedge risk, mitigate price bubbles, and also to make a quick profit from falling market prices.

Naked short-selling occurs when a trader decides to sell a financial instrument that he neither owns, nor has arranged in advance to borrow from another market participant.

Governments allege that, in some cases, short-selling has been used deliberately to drive down the value of EU sovereign debt.

Officials said that the draft law, which is not yet finalised, is likely to include an obligation on traders to disclose to regulators short positions that are above a certain financial threshold. Positions would have to be disclosed to the general public if they were above another, higher threshold. This would, the Commission hopes, reveal abusive speculative activities, which regulators could then take steps to curtail.

Prior warnings

The draft legislation will also include measures to promote financial stability, among them a rule that traders must not engage in short-selling until they have ensured that they can obtain the instruments that they intend to sell. The Commission is also expected to propose that, as a last resort, trading venues should have to step in to complete a short-sale if a trader cannot supply the instrument that he has agreed to sell.

The Commission is expected to propose that national regulators should be obliged to provide prior warning to other member states and the planned European Securities and Markets Authority (ESMA) before introducing any ban on short-selling. ESMA would give a non-binding, public opinion on whether the proposed ban would be justified.

The draft law will stipulate a minimum period of time between the warning being given and the ban being introduced.

Some market participants have welcomed the Commission’s plans because they would help to avoid regulatory distortions between member states.

“We are happy with a harmonised approach at EU level,” Roger Cogan, policy director at the International Swaps and Derivatives Association, said.

“We fundamentally support all [trading] information being made available to regulators,” he added.

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