EU law to crack down on abusive short selling
LONDON (Reuters) - 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 Reuters on Wednesday.
The bloc's financial services chief, Michel Barnier, has already flagged the measure he is due to publish on September 15.
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 euro zone sovereign debt markets earlier this year.
Experts said a bloc-wide law will have a good chance of being approved to avoid a repeat of patchwork national measures that caused confusion among investors.
After the collapse of Lehman Brothers bank in September 2008, Britain and other EU states introduced varying 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 that short selling provides to the quality and efficiency of markets," the draft law obtained by Reuters 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.
AIMA, the hedge fund lobby, said a pan-EU approach to short selling would end uncertainty and confusion and keep compliance costs down but that position disclosures should be done on an aggregated and anonymous basis.
It opposed bans at any time, however.
"The crisis experience has shown that imposing such bans does little to calm a market panic," AIMA CEO Andrew Baker said.
ESMA would also be able to overrule unilateral emergency actions by states, such as Germany's ban.
"Any action taken by ESMA in such emergency situations would take precedence over action by competent authorities if there is any inconsistency," the measure says.
The law would ban all naked short selling of shares and sovereign debt.
In addition, if any short or naked selling of financial instruments is sparking significant falls -- 10 percent 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.
"Such a 'circuit breaker' power should enable competent authorities to intervene if appropriate to ensure that short selling does not contribute to a disorderly price fall in the instrument concerned," the draft law says.
Simon Gleeson of Clifford Chance law firm said the very short-term powers could be used to support prices of particular instruments during a crisis.
"This may or may not be useful, but it is certainly better for it to happen in a coordinated fashion than for the market to have to grapple with multiple conflicting national regimes," Gleeson said.
Outside emergency periods, market participants would be required to report to regulators and in some cases to markets their significant net short positions in shares, government debt and sovereign credit default swaps.
The thresholds for reporting short positions in shares to regulators and the public follow the model already published by the Committee of European Securities Regulators (CESR).
Only disclosure to regulators would be required in sovereign debt positions and this will also apply to short positions built up by trading on and off an exchange and those built up by using options, futures, contracts for difference and spread bets.
Traders may also have to flag to the stock exchange if their share sell orders are part of a short sale.
Short sellers in shares and government debt will have to make prior arrangements to borrow the assets so they can settle the trade on time, otherwise face a daily penalty, the draft law says.
The measure foresees exemptions from position reporting, pre-borrowing requirements and late settlement penalties for the shares of a company where the main market is outside the EU.
Market making activities and primary market operations performed by dealers who help to issue sovereign debt would also have similar exemptions.
The measure, which needs approval from EU states and the European Parliament to become law, is expected to become effective some time in 2011 or 2012.
(Reporting by Huw Jones; Editing by Ruth Pitchford)
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