European Commission in short-selling clampdown
Published 16/09/2010 | 08:00
The European Commission has outlined plans to crack down on short selling, including banning it in extreme circumstances, as it seeks to head off "disorderly markets and systemic risks".
The proposals will hand greater powers to the national watchdogs to patrol short selling - where traders sell shares they have borrowed hoping to make a profit if the value of the stock falls - and derivatives trading.
"No financial market can afford to remain a Wild West territory," said Michel Barnier, the Commissioner for Internal Market and Services.
Yet, City veterans poured scorn on the regulation, with one saying it would have an effect of "between zero and minus zero".
National regulators will now be able to step in and restrict, or even ban, short selling "in exceptional situations". This will be overseen by the European Securities and Markets Authority, a new body that will be operational from January if ratified by the European Parliament. The body will also have the powers to step in and ban short selling.
"In normal times, short selling enhances market liquidity and contributes to efficient pricing. But in distressed markets, short selling can amplify price falls, leading to disorderly markets and systemic risks," Mr Banier said.
The rules around naked short selling - where the trader sells a share before he has agreed to borrow it - which is seen as even riskier, has also been tightened up.
The commissioner bemoaned the lack of reliable information on short selling and the proposals require greater disclosure and more data available for those who sell short and trade in derivatives.
All short trades must now be clearly marked.