Brussels, 26/08/2011 (Agence Europe) - Five EU member states (Belgium, Spain, France, Greece and Italy) decided on 25 August to continue to restrict short selling of national financial securities (in close cooperation with the European Securities and Markets Authority, ESMA). They took the measures last week and they were initially planned to last a fortnight during the sound and fury of the turbulence on the stock exchanges over the summer, fed by fears about lack of financial solidarity among eurozone countries following the downgrading of the United States' credit rating for the very first time.
The Italian and Spanish stock exchanges regulators, Consob and CNMV respectively, will be extending their ban on short-selling until Friday 30 September. The Greek financial markets authority is extending its ban until Friday 7 October, and the ban will last in France until Friday 11 November. The French ban covers ten banks, including Crédit Agricole and Société Générale, both very exposed to the Greek economy. The Belgian government has not indicated how long its extension of the ban on short-selling is likely to last.
Short-selling allows traders to make huge sums of money when stocks plummet through selling a stock one does not yet own and buying it back later, at a lower price, before the settlement date (profiting from the fall in the stock's value without having to actually part with cash to buy the share). Naked short-selling is the same process, but without borrowing the stock or ensuring it is actually available at the moment of selling. Naked short-selling has been criticised for sending the stock markets into free fall in 2008, when various member states took action individually to try and limit the damage.
Naked short-selling of eurozone sovereign debt has been banned in Germany since early 2010 (the time of the first Greek bailout). BAFIN, the German stock market regulator, quashed rumours on Thursday that it was considering extending the ban to prevent panic selling.
Negotiations are under way between the member states and the European Parliament to introduce EU rules on short-selling. The MEPs made their position clear at the start of last month, based on the European Commission's suggested naked short-selling restrictions. Sellers who do not actually own a stock will have to agree with a third party to reserve the stock to ensure it can be actually delivered on the payment date (known as the “locate rule”, see EUROPE 10412). The Council of Ministers takes a similar view, but the European Parliament wants to ban naked short-selling of credit default risk for sovereign debt (sovereign CDS). Such a ban on credit default swaps would prevent traders who do not own bonds of the country in question from making a killing on the back of the financial difficulties faced by countries like Greece. Member states fear that a ban on sovereign CDS would have a serious negative impact on the sale of bonds (and hence the availability of sovereign debt rollovers, see EUROPE 10380 and 10377). (M.B./transl.fl)