Brussels, 14/06/2010 (Agence Europe) - The European Commission has started a public consultation exercise that will run until Saturday 10 July for market players and regulators on options for forthcoming EU legislation on short-selling. It will be asking what role the new European Securities Markets Authority (ESMA), included in the financial package, could play in any ban on speculative short-selling for emergency situations. The consultation will be followed by draft legislation in September. France and Germany recently increased pressure on the European Commission to speed up work in this field (see EUROPE 10156).
Short selling is the sale of a security that the seller does not own, with the intention of buying back an identical security at a later point in time in order to be able to deliver the security. Short selling can be divided into two types: (1) "Covered" short selling is where the seller has borrowed the securities, or made arrangements to ensure they can be borrowed, before the short sale; and (2) "Naked" or "uncovered" short selling is where the seller has not borrowed the securities at the time of the short sale, or ensured they can be borrowed. The Commission believes that short-selling can increase market liquidity and hedge against risk but abusive short-selling can lead to lower market values and impact on financial stability. In the face of the range of reaction from the member states to speculation on sovereign debt credit default swaps in the eurozone, the Commission suggests that new regulation be introduced to increase transparency in short-selling, cut the risks associated with naked short-selling and ensure coordination at EU level of emergency action by member states' authorities.
CDS. In emergencies, competent national authorities can ban types of deal. To everyone's surprise, Germany had decided to ban (until 2011) naked short-selling of eurozone country bonds (state debt) and some credit default swaps for sovereign debt (CDS). The Commission says that ESMA should ensure that member states' authorities' action is coherent. At least 24 hours before any action comes into effect, competent national authorities would have to notify ESMA and the relevant authorities in other member states of any decision to ban naked types of short-selling or CDS. It would have to provide details of the planned measure and explain why it is being taken. If an authority in another member state believes the measure is justified (even if its own markets are not affected), then it could issue the same ban. A competent authority acting against ESMA's advice would have to explain itself. Any ban and any decision to issue a ban could last no longer than three months. The Commission will not be looking in the consultation exercise at giving ESMA itself the power to ban short-selling but the Commission points out that its initial draft financial supervision legislation would grant ESMA binding decision-making powers over national authorities in emergency situations. This line is shared by the EU Council of Ministers but not by the European Parliament. (M.B./transl.fl)