EU to Allow Temporary Ban on Short-Selling
September 2, 2010
European regulators could be allowed to ban abusive short selling of equities and naked short selling of credit default swaps and sovereign debt for three months at a time.
Set to be published on Sept. 15 is a draft of a European Union-wide legislation which allows the new European Securities and Markets Authority to be given emergency powers to ban short selling temporarily for three months in shares, sovereign bonds, derivatives relating to sovereign bonds and credit default swaps linked to government bonds.
In naked short selling, a short-seller has not borrowed the securities that are the object of the short sale. When this happens, a settlement failure could occur and the stock price could become more volatile.
The new ESMA, set to be in place as of January 2011, would be permitted to overrule financial regulators in individual EU countries. The new legislation, which could become effective either in 2011 or 2012, follows calls from some EU member states to crack down on speculative trading.
After the collapse of Lehman Brothers in September 2008, the UK and other EU countries introduced varying bans on short selling; Germany's decision to ban naked short selling of 10 German stocks and other financial instruments upset some of its other EU countries which refused to follow suit.
The European Commission had asked for industry input on the new legislation in June and the comment period ended last month.
Among the new measures other provisions: the ESMA could impose a one-day ban on individuals short-selling a financial instrument for one day. Market players would also be required to report to regulators significant short selling positions in some financial instruments.
The Alternative Investment Management Association (AIMA), the London-based trade group representing the European hedge fund industry applauded the EU’s attempt at harmonization but didn’t agree with the ban or reporting requirements. It said that disclosures of short positions should be done on an aggregated and anonymous basis and opposed bans on short-selling. “The crisis experience has shown that imposing such bans does little to calm market panic,” said Andrew Baker, CEO of the AIMA.
