Tags: EU | Stop | Debt | Shorting | Government

EU May Limit Naked Shorts of Stocks, Government Debt

Thursday, 02 Sep 2010 11:06 AM

The European Union may limit so- called naked short sales of shares and government debt, which it says can cause a “disorderly market and possible systemic risks.”

Traders would be required to submit proof that they have access to the underlying security to settle a trade designed to profit from a decline in prices, according to a European Commission document obtained by Bloomberg News.

The proposals, which must be approved by the full commission before being submitted to the Parliament and national governments, require short sellers to show they “can ensure that the security can be borrowed so that settlement can be effected,” the document said.

German Chancellor Angela Merkel, who banned some naked short selling in Germany in May, called on the commission earlier this year to speed up curbs on financial speculation. Merkel and French President Nicolas Sarkozy argued that some bets against stocks and government bonds should be banned as the Greek debt crisis made markets more volatile.

The proposed legislation would ban most naked short selling depending on “what you mean by naked,” said Simon Gleeson, a regulatory lawyer at Clifford Chance LLP in London.

“Nobody opens a short without intending to settle it, and you settle a short by borrowing stock or buying it,” Gleeson said in an e-mail. “What this comes down to is a rule that you can’t open a short unless you have first phoned a lender.”

The draft rules would also force traders to notify “significant exposures in credit default swaps that relate to EU sovereign debt issuers” to EU regulators, the document said, but wouldn’t apply to shares of a company that principally trade on a venue outside the EU.

The rules would also give regulators emergency powers to impose additional disclosure requirements or “impose temporary restrictions on short selling and credit default swap transactions.”

The European Parliament, finance ministers from EU member states and the European Commission will discuss the draft rules before they become law, which is aimed at harmonizing different regulatory approaches to short selling in the 27 EU member states.

Germany largely failed to persuade other EU nations to follow its May 19 prohibition on naked short-selling and speculation on European government bonds.

The EU rules are in the form of a regulation, which would become law once signed off by lawmakers, rather than a directive, which gives national governments room to interpret the bill.

Credit-default swaps are derivatives that pay the buyer face value if a borrower — a country or a company — defaults. In exchange, the swap seller gets the underlying securities or the cash equivalent. Traders in naked credit-default swaps buy insurance on bonds they don’t own.

© Copyright 2010 Bloomberg News. All rights reserved.

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The European Union may limit so- called naked short sales of shares and government debt, which it says can cause a disorderly market and possible systemic risks. Traders would be required to submit proof that they have access to the underlying security to settle a trade...
EU,Stop,Debt,Shorting,Government
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2010-06-02
Thursday, 02 Sep 2010 11:06 AM
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