European court to rule on UK's clash with EU over short-selling

LONDON Tue Jan 21, 2014 9:14am EST

LONDON Jan 21 (Reuters) - Europe's top court will rule on Wednesday on a UK challenge to a European Union market watchdog's powers to ban short-selling in an emergency, which Britain argues unduly shackles national supervisors.

A win at the European Court of Justice in Luxembourg could force Brussels to limit the scope of financial rules and lend momentum to UK Prime Minister David Cameron's push to renegotiate the country's membership of the EU and put it to a referendum in 2017.

Polls suggest his government faces a drubbing in May's European Parliament elections by the anti-EU UK Independence Party, which on Monday sought to woo the financial vote.

Britain is challenging part of a law regulating short-selling, or the sale of borrowed shares in a bet the price will fall so they can be bought back more cheaply to turn a profit.

Under the law the European Securities and Markets Authority (ESMA) has the power to ban or curb short-selling if stocks come under extreme pressure.

An advisor to the European Court of Justice in September, sided with the UK in September, saying in an opinion that such an emergency power went beyond what the watchdog could do under the EU treaty provision used to approve the law.

Alexandria Carr, a regulatory lawyer at Mayer Brown, said that if the court endorsed the opinion it could have a big effect on several financial rules being negotiated.

Britain is also challenging three other EU rules: A cap on bankers' bonuses; plans for a financial transaction tax; and the European Central Bank's attempt to force some clearing houses to relocate to the euro zone.

The bloc reached a political deal last week on a sweeping reform of its securities trading rules, which could be affected if the court backs Britain.

Carr said that if the court sided with the UK over short selling it could mean that ESMA's new powers to regulate commodities markets under last week's deal may also be curbed.

Separate plans are being finalised to centralise powers to wind down troubled euro zone banks and such decision-making could become open to question, Carr added.

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