EU regulators in talks over banning short selling

REGULATION:EUROPEAN REGULATORS were last night discussing whether to impose a contentious ban on short selling as they sought to stem recent sharp falls in share prices.

France is in favour of a ban after a week of rumours but Britain is against one.

The new European Union market regulator, Esma, is trying to co-ordinate action by national regulators and a final meeting could take place today to decide whether to press ahead.

Greece and Turkey have already imposed bans on short selling, where investors aim to profit from price falls.

Bans on so-called naked shorting – selling shares that an investor neither owns nor has borrowed – are already in place in Italy, Germany and Spain.

Global equity markets moved higher on news of the talks with shares in London, Paris and Frankfurt closing up about 3 per cent. The SP 500 was up 3.5 per cent at midday in New York after the lowest level of US jobless claims since April provided some reassurance that it was not heading towards a double-dip recession.

The move to ban short selling would be reminiscent of action in the volatile period after the collapse of Lehman Brothers in 2008.

But academics who have studied those bans said a similar move now could backfire.

“It is the worst thing to do right now. This would signal to the market there may be something fundamentally bad that is happening,” said Abraham Lioui, a professor at Edhec in France.

However, a senior French government official said a ban had proved to be an effective tool during the financial crisis. “It is a weapon we have when markets are dysfunctional. And the market has shown it is behaving dysfunctionally , moving on false and unfounded rumours.”

Rumours over an imminent credit rating downgrade have been denied by rating agencies and the French government. But they helped send shares in Société Générale down 15 per cent on Wednesday and by as much as 9 per cent yesterday. They recovered to close up 6 per cent.

France’s Financial Market Authority warned it would take action against anyone found to have spread false information.

The discussion of a ban came after jarring events in currency markets. The Swiss franc dropped sharply after the Swiss National Bank (SNB) refused to rule out pegging the currency to the euro in an attempt to weaken it after it rose to record levels against the single currency and dollar.

Thomas Jordan, SNB vicepresident, said further intervention was possible, heightening speculation the bank might be considering capital controls.

The Swiss franc fell 5.3 per cent to SFr1.0850 against the euro and was down 4.6 per cent at SFr0.7614 against the dollar in midday trading in New York. The Japanese yen remained close to record levels. The dollar fell as low as Y76.29, just shy of the record low. The renminbi moved higher against the dollar. – (Copyright The Financial Times Limited 2011)