EUROPEAN Union regulators would be able to ban abusive short selling of shares and naked selling of credit default swaps and sovereign debt for three months or more under a draft EU law seen by sources yesterday.
The bloc’s financial services chief, Michel Barnier, has already flagged the measure he is due to publish on 15 September.
It follows calls from some member states to crack down on what they saw as speculators – typically politicians’ code for hedge funds – causing mayhem in Greek and other Eurozone sovereign debt markets earlier this year.
After the collapse of Lehman Brothers bank in September 2008, several EU states introduced a patchwork of short selling bans on financial shares.
In May, Germany introduced a ban on all naked short selling of 10 German stocks, euro government bonds and credit default swaps on euro government bonds, shaking global markets and upsetting its EU partners who refused to follow suit.
Short selling is “naked” when sellers have not arranged to borrow the assets.
Following these two episodes, Barnier wants a pan-EU law on short-selling to ensure consistent, proportionate actions across the bloc in emergencies. “The regulation aims at addressing the identified risks without unduly detracting from the benefits,” the draft law said.
The measure will cover all financial instruments such as shares, sovereign bonds, derivatives relating to sovereign bonds and credit default swaps linked to government bonds.
The new European Securities and Markets Authority (ESMA), due to be in place from January, will be given powers to introduce emergency measures, such as bans for up to three months, renewable for a further three months at a time.
In addition, if any short or naked selling of financial instruments is sparking significant falls – 10 per cent or more from the previous day –?ESMA could seek to cool markets by imposing a one-day ban on “persons” short-selling a financial instrument.a
City A.M. Reporter