–Adds More Detail On New Naked Short Selling, OTC Disclosure Rules

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 new rule on naked short selling stipulates that in order to
enter into a short sale, an investor must have borrowed the instruments
concerned, entered into an agreement to borrow them, or have an
arrangement with a third party who has located and reserved them so that
they are delivered by the settlement date.

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 new rule, expected to take effect towards the end of 2012,
would supercede national regimes, such as the German law earlier this
year that banned naked short selling outright.

“My clear objective is to reduce and ban abusive naked short
selling,” said Michel Barnier, the European Commissioner for Internal
Markets and Services. “We must eliminate the risk of intensive
hyper-speculation.”

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 company’s 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,” Barnier said. “Today’s proposal will increase
transparency for regulators and markets, and make it easier for
regulators to detect risk in sovereign debt markets.”

The Commission would also make reporting of over-the-counter
derivatives trades mandatory for the first time. Under the proposal
unveiled today, OTC trades in all derivative classes would be reported
through central trade respositories, to which national regulators in the
EU would have access.

Under the Commission’s proposal, trades of OTC derivatives in the
EU would have to be reported to central data centres, known as trade
repositories, to which national regulators in the EU will have access.
These repositories would publish aggregate positions by derivative
class, thus giving all participants a clearer view of the OTC
derivatives market, the Commission said.

All “eligible” OTC derivatives would be traded through
intermediaries known as “central counterparties” (CCP), which can pick
up one side of a deal if the party to it falters. The idea, the
Commission said, is to “prevent the situation where a collapse of one
market participant causes the collapse of other market participants.”

Eligibility of derivatives for trading through these CCPs would be
based on certain minimum standards, such as a high level of liquidity.
If a trade contract is not deemed eligible and therefore not cleared
through a CCP, it would be subject to other risk management techniques,
including requirements to hold more capital. CCPs themselves would be
subject to a stringent code of requirements and internal rules and could
be audited, the Commission said.

The proposals will require approval by the European Parliament and
the EU’s Council of Ministers before they can take effect.

–Paris newsroom, +331-42-71-55-40; bwolfson@marketnews.com

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