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EU seeks new rules on abusive short-selling

Thursday, September 02, 2010
Opalesque Industry Update – European Union lawmakers are drafting new rules to empower regulators to stop abusive short-selling. At the same time, the draft legislation also aims to ban naked selling of credit default swaps and sovereign debt for three months or more.

EU’s financial chief Michael Barnier is expected to publish the draft measure on Sept. 15, according to Reuters which had access to the proposed law on Wednesday.

The move came after several member-states called for a bloc-wide action against speculators, specifically from hedge funds which they blame for Greek’s credit default, and turmoil within other euro zone sovereign debt markets earlier this year. Many analysts predict that an EU-wide legislation would have a stronger effect than individual measures taken by member-states, that in the past have only created confusion among investors.

Some EU states, including Britain, introduced independent short selling bans on financial shares in the aftermath of Lehman Brother’s collapse in September 2008. Germany enforced a ban on the naked short selling of 10 German stocks, euro government bonds and credit default swaps on euro government bonds in May which shook global markets and upset EU partners who did not adopt the measure. That ban will remain in effect until March 31, 2011

The draft bill seeks to provide extra powers to the new European Securities and Markets Authority (ESMA), which is scheduled to start operating in January 2011. A report by the International Business Times said that ESMA would have the authority to overrule any actions taken by member-states on short-selling. In effect, the proposed measure lifts all short-selling bans in single countries.

The draft rule also calls for the temporary suspension of short-selling instruments or persons should a single share fall by more than 10% on a single day. It also contains provisions on new reporting requirements of market participants.

Investors or traders with exposures in shares and EU government bonds will be required to disclose their positions to their national regulators. For shares, a net short position has to be reported when it reaches 0.2% of the company's share capital, and should be notified publicly when exceeding 0.5%, the report said.

But there are still some apprehensions on how individual member-states will react to the proposed draft.

According to GSL.tv, it remain to be seen how each EU member-state will respond to the draft bill, particularly on the provision giving ESMA the authority to overrule their individual approaches.

Greece lifts short-selling ban
Also on Wednesday, the Greece government lifted its ban on short-selling which is expected to bring back short-trade traders and help boost the ailing economy with increased trading volumes.

The news was welcomed by the markets after Greek stocks gained almost 1% on light volume of 75m euros. Brokers said they predicted volume to pick up soon.

Short-selling consultation
The European Commission (EC) launched a bloc-wide consultation in June on short-selling before deciding to introduce the ban. The consultation was aimed at getting feedbacks from member-states on the back of fragmented approaches on short selling.

Barnier also proposed in June to allow EU market supervisors to impose temporary ban on naked short selling of credit default swaps and shares in times of extreme volatility.
- Komfie Manalo

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