EU INTERNAL markets commissioner Michel Barnier has unveiled far-reaching plans to curtail short-selling and regulate derivatives trading, opaque but popular modes of investment which have been blamed for fanning Europe’s sovereign debt crisis.
The legal measures, which Mr Barnier hopes to put on the statute book by 2012, would provide for a temporary ban on short-selling while radically increasing oversight of the derivatives market.
“No financial market can afford to remain a Wild West territory,” said Mr Barnier. “We have to limit risks of hyper-speculation.”
The new measures to curtail short-selling, the sale of a security that the seller does not own, will also tackle the market for credit default swaps, essentially a form of insurance against default on a debt such as a sovereign bond.
They also make it considerably more difficult to execute a form of trade known as “naked short-selling”, where the seller has not borrowed the securities at the time of the short sale.
The proposals are already being resisted by finance industry lobby groups.
“We, however, feel that the commission goes too far in trying to achieve its regulatory objectives”, said European Banking Federation chief Guido Ravoet, whose members include the Irish Banking Federation.
Mr Barnier said he wanted to address the absence of transparency in these markets, the risk of negative price spirals and the risk of settlement failure in “naked short-selling” trades.
The proposals will have to be agreed by member states and the European Parliament before they become law.
They come weeks after the conclusion of difficult talks on the creation of new pan-European regulators with responsibility for banks, insurers and market traders and the creation of a new authority to monitor systemic risks.
The commission said it was including credit default swaps in the proposal because they could be used to secure a position economically equivalent to a short position in the underlying bonds.
One proposal would give oversight of short-selling trades to the new EU markets regulator, giving it the power to impose a three-month ban on such deals or unilateral national bans such as controversial measures introduced by Germany earlier this year.
In the case of “naked short-selling”, regulators would be able to demand that sellers demonstrate their capacity to complete the deal. In essence this means that investors would have to have borrowed an instrument or have pledged to do so before entering such a transaction.
The EU executive wants information on over-the-counter derivative contracts to be reported to trade repositories and be accessible to supervisory authorities.
It also wants standard over-the-counter derivative contracts cleared through central counterparties to reduce the risk that one party to the deal defaults.
