Naked short sale ban "diluted" - European parliament
19 October 2011 Strasbourg
Image: Shutterstock
A short selling regulation deal has been reached by the European parliament in a bid to beef up standards and requirements.
Naked CDS trading will be banned if the agreement is ratified next month and enters into force in November 2012. This is considered a major victory by regulators who fought to put an end to sovereign debt speculation by entities that do not own the related bonds.
The sole exception to the proposed naked CDS ban is an option for a national authority to lift it temporarily in cases where its sovereign debt market is no longer functioning properly though the circumstances under which this is allowed are heavily prescriptive.
Also key to strengthening the Commission proposal is stepping up reporting requirements. For example, supervisors would be informed of large short positions when this position accounts for 0.5 per cent of the issued capital.
The MEPs' wish that naked short sales would no longer be possible for more than one day was however diluted. The hard "locate and reserve rule", whereby a trader must not only notify from where it plans to borrow the shares in question but must also have a guarantee that it will indeed be able to borrow them, was diluted, requiring the trader to locate and have a "reasonable expectation" of being able to borrow the shares from the located party.
MEPs from groups sponsoring the deal also managed to preserve the powers of the EU's financial markets watchdog, ESMA, in particular to restrict short selling, as an arbiter of a national authority's wish to introduce measures to address exceptional situations, and also to require other authorities to introduce exceptional measures to deal with difficult situations.
"The new powers for ESMA will allow for better coordination at the EU level in times of crisis", said rapporteur Pascal Canfin (Greens, FR), adding however that "It would have been better had ESMA had similar powers over decisions relating to sovereign debt but the Member States refused".
Naked CDS trading will be banned if the agreement is ratified next month and enters into force in November 2012. This is considered a major victory by regulators who fought to put an end to sovereign debt speculation by entities that do not own the related bonds.
The sole exception to the proposed naked CDS ban is an option for a national authority to lift it temporarily in cases where its sovereign debt market is no longer functioning properly though the circumstances under which this is allowed are heavily prescriptive.
Also key to strengthening the Commission proposal is stepping up reporting requirements. For example, supervisors would be informed of large short positions when this position accounts for 0.5 per cent of the issued capital.
The MEPs' wish that naked short sales would no longer be possible for more than one day was however diluted. The hard "locate and reserve rule", whereby a trader must not only notify from where it plans to borrow the shares in question but must also have a guarantee that it will indeed be able to borrow them, was diluted, requiring the trader to locate and have a "reasonable expectation" of being able to borrow the shares from the located party.
MEPs from groups sponsoring the deal also managed to preserve the powers of the EU's financial markets watchdog, ESMA, in particular to restrict short selling, as an arbiter of a national authority's wish to introduce measures to address exceptional situations, and also to require other authorities to introduce exceptional measures to deal with difficult situations.
"The new powers for ESMA will allow for better coordination at the EU level in times of crisis", said rapporteur Pascal Canfin (Greens, FR), adding however that "It would have been better had ESMA had similar powers over decisions relating to sovereign debt but the Member States refused".
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