–Proposals Include Restriction on Naked Short Selling

PARIS (MNI) – The European Union will restrict naked short selling
while sharply increasing the transparency and regulation of
over-the-counter derivatives trading, according to proposals unveiled
today by the European Commission.

The proposals would require, among other things, that before taking
a short position sellers either borrow or reserve for borrowing the
instruments they are agreeing to sell. This restricts the practice of
naked short selling, in which investors take their positions without
having secured or arranged to secure the underlying instruments. Naked
short selling is widely considered to have exacerbated the Greek debt
crisis, which later expanded into a broader Eurozone-wide crisis.

The Commission is also proposing a rule that would create greater
transparency by requiring that all short orders on shares be marked
“short,” so that regulators can better track them.

For the first time, there would be specific thresholds above which
investors’ net short positions must be reported to regulators and to
markets. Individual short positions at 0.2% or more of a companies’
total issued shares would need to be reported to market regulators,
while a holding of 0.5% or more would require reporting to the broader
market.

The “flagging” of short orders is expected to help regulators more
easily detect potentially destabilizing movements in sovereign debt
markets, the Commission said.

The rules proposed by the Commission would also give national
regulators “clear powers in exceptional situations” to temporarily
restrict or ban short selling in any financial instrument, subject to
approval from the newly-created European Securities and Markets
Authority (ESMA), which would itself have the power to restrict or
prohibit 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,” Michel Barnier, the European Commissioner for internal
markets, said. “Today’s proposal will increase transparency for
regulators and markets, and make it easier for regulators to detect risk
in sovereign debt markets.”

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