EU Approves New Restrictions On Short Selling
Friday, October 21, 2011

European Internal Market Commissioner Michel Barnier has welcomed the tripartite agreement by the European Commission, the EU Council and EU parliament on new rules for short selling and Credit Default Swaps (CDS), aimed at bolstering the stability of financial markets.

According to the Commission, the agreement of October 18 "represents a significant step towards greater transparency, stability and responsibility in short selling transactions and sovereign Credit Default Swap (CDS) markets".

The agreement will now need to be formally endorsed by the European Parliament, Council and Commission. When this regulation enters into force, regulators will be able to respond in a more coordinated and effective way when short selling poses a risk to the stability of markets.

For shares, new requirements are to be introduced to ensure that significant short positions are disclosed to regulators and the market, aimed at providing greater transparency on transactions which are currently opaque. Clear powers for regulators, and under certain conditions the European Securities and Markets Authority, to temporarily restrict short selling in exceptional situations, will promote stability through coordinated action where necessary, says Barnier.

So-called 'naked' sovereign CDS positions will be prohibited under the new agreement where the short seller does not acquire the sovereign CDS prior to sale. The restriction will not apply to primary dealers and market makers. A competent authority will be able to temporarily suspend these restrictions where it believes, based on objective elements, that its sovereign debt market is not functioning properly and that such restrictions might have a negative impact on the sovereign credit default swap market.

Barnier said that: “These balanced measures will ensure that sovereign CDSs are used for the purpose for which they were designed, hedging against the risk of sovereign default, without putting at risk the proper functioning of sovereign debt markets.”

He added that: “In the current difficult economic circumstances, I particularly welcome Parliament and Council's endorsement of proportionate measures concerning sovereign debt and sovereign CDS, to ensure that regulators have access to the data they need and can act to restrict short selling of sovereign debt and limit sovereign CDS transactions when stability is at risk.”

Barnier concluded that: “Short selling did not cause the crisis, but can aggravate price declines in distressed markets. The events of autumn 2008 and those of recent months amply demonstrate the urgent need for a common European framework for short selling and CDS. By agreeing the Commission's short selling regulation just over a year after it was proposed, the European Parliament and the Council have risen to the challenge."