15/06/2010 Author: Shannon Hawthorne

EC publishes draft paper on naked short selling 

The European Commission has published a draft consultation paper outlining possible rules which would allow temporary bans on the naked short selling of shares and credit default swaps (CDSs) during periods of market volatility.

Among the proposed rules outlined in the paper are restrictions on short selling in an emergency, a provision which would give national supervisors the power to prohibit or restrict short selling in situation where the stability of the financial markets is at risk.

The draft paper, which proposes that the European Securities Market Authority (ESMA) should take on the role of the coordination and facilitation, also puts forward rules enabling the restriction of the short selling of shares if the price of said shares has fallen by 10% or more from the previous day’s closing price.

“The Commission believes that working towards a more harmonised regime will increase the resilience and stability in financial markets in the European Union,” said EU Internal Market Commissioner Michel Barnier, who recently moved up the deadline for the finalised proposal from October to September.

Last month, Germany unilaterally banned the naked short-selling of Eurozone government debt and major financial stocks, as well as naked credit default swaps involving Eurozone debt.