EUROPE: Crack down on EU short selling and sovereign debt speculation

Wednesday October 19 2011

Further to the update of 18 October, lead MEPs and the Polish Presidency have clinched a deal on the regulation beefing up standards and requirements for the practices of EU short selling and trading in credit default swaps.

The rules will impose much more transparency, increase the powers of the EU`s financial watchdog and virtually ban certain CDS trades, thereby making speculation on a country`s default more difficult.

This is one of the key regulations pushed through by the Commission to tackle the financial crisis. It will strengthen rules on EU short selling and CDS trading, two practices accused of fuelling market volatility. CDS trades have been widely blamed for potentially aggravating Greece`s troubles.

Parliament`s negotiators obtained a ban on naked CDS trading, with the sole exception of an option for a national authority to lift the ban temporarily in cases where its sovereign debt market is no longer functioning properly. MEPs from groups sponsoring the deal also managed to preserve the powers of the EU`s financial markets watchdog, ESMA, in particular to restrict EU 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.

Another key to strengthening the Commission proposal is stepping up reporting requirements. A lack of information was one of the main problems for supervisors before the crisis. The extra information to be provided to national and European supervisors will allow them to carry out their preventive work better by alerting them earlier to potential risks.

Both Council and the full Parliament must now ratify the agreement. A plenary vote in Parliament is expected to be taken in the third week of November. The regulation is expected to enter into force in November 2012.

Click on the above link for more details.