EU compromise plan on short selling curbs close

The European Union is moving closer to tighter controls on speculators with compromise plans to curb the short selling of government debt and shares.

It wants a European watchdog to halt some trading and impose restrictions on the short selling of state debt and company shares. It would require investors to reveal big short selling positions to regulators.

If both parliament and EU member countries reach agreement, the law could be in place by the end of this year. EU countries will, however, be allowed veto such a ban.

‘We had major issues particularly with Greece where clearly there were significant market movements totally unidentified. We are trying with this piece of legislation to remedy that situation,’ France's finance minister Christine Lagarde told a meeting of European Union finance ministers in Brussels.

Gyorgy Matolcsy, the Hungarian finance minister who brokered the agreement between the EU member states, said the current compromise being discussed delivers on the key objectives of transparency, a permanent ban on naked short selling and the reinforcement of supervisory authorities.

Although he highlighted a ban on naked short selling, where the seller does not own nor has borrowed the shares he has promised to sell, traders will still be able to do so, provided they show a reasonable chance of getting the securities to close the deal.

The European Parliament wants to take a harder line by including a measure to ban outright naked selling of default insurance or credit default swaps (CDS) for country debt. But EU member states are unlikely to back this and some EU officials expect a compromise to be agreed.

Naked selling refers to buying a CDS contract, a type of tradeable insurance to cover default, without owning the underlying government debt.

The new EU law will not impose a blanket ban on short sellers, who typically borrow shares or securities and sell them on, in anticipation that the price will fall and they can repay the lender with stock bought for less. But it will establish a way of introducing a ban, coordinated across Europe by a markets watchdog in Paris.

This would prevent a repeat of Germany's ban last year on naked short selling, which rattled global markets and angered EU neighbours who had not been consulted on its solo move.

Much of the success of the new short selling regime will depend on the strength of the new markets watchdog, which took on the pan European policing of financial markets in January.

Some fear, however, that the European Securities and Markets Authority, starved of resources and subject to infighting among the European regulators who have a say in its decisions, may struggle to impose its authority.

Countries like Britain are sceptical about the new agency and secured a veto to challenge its decisions. They will watch the agency closely, restricting its freedom.

Experts also question the usefulness of a crackdown on short sellers whom they believe played only a small role in the financial crisis.

Others have grown frustrated with the pace of EU financial reform, which has often become bogged down in rows among countries on how to tackle hedge funds or banks.