The proposals, released to coincide with the collapse of Lehman Brothers two years ago, require increased disclosure of short selling positions against companies and government debt as well as handing the European Securities and Markets Authority, one of the EU’s newly created financial regulators, the power to temporarily ban short selling altogether.
Investors will need to disclose short positions to regulators if they exceed 0.2 per cent of a company’s issued share capital, and to the rest of the market if the short position exceeds 0.5 per cent.
The proposals also cover credit-default swaps and the clearing of over-the-counter derivatives – a $600 trillion (£384 trillion) market. In a bid to reduce counterparty risk, most derivatives trades will have to be routed through centralised clearing houses providing a safety net in the event of a collapse, and ensuring regulators know how much money firms owe each other. This forced transparency, will challenge the dominance of the roughly half a dozen large banks, including Deutsche Bank, Barclays, Goldman Sachs, JP Morgan, Bank of America and Citigroup, which currently design derivatives for customers and trade them among themselves.
Michel Barnier, the EU’s financial services commissioner, insisted that the regulatory overhaul was vital for the future stability of Europe’s financial system.
“No financial market can afford to remain a Wild West territory,” he said.
Barnier also sought to dampen fears that the new rules could drive dealers away from the City, where 40 per cent of the global derivatives trade is based, saying similar measures were being brought in worldwide.
Andrew Baker from the Alternative Investment Management Association welcomed the standardisation across Europe, but slammed short position reporting to the market as “uncompetitive.”
Darren Fox, a partner at Simmons & Simmons, said the disclosure requirements would “potentially be very expensive” for firms and trading venues.
While Kevin McNulty, head of the International Securities Lending Association, said the proposed thresholds were too low and could encourage investors to curb their trades to stay beneath those levels, reducing liquidity and ironically creating riskier trading conditions.
The regulations, which still need to be approved by EU member states and the European parliament, are expected to be in place by July 2012.