European Commission proposes restrictions on financial practices

RESTRICTIONS on some of the practices blamed for triggering the economic crisis have been put forward by the European Commission as part of a major overhaul package.

They deal with credit default swaps, short selling and the $600 trillion derivatives market, and are designed to make it easier for regulators to detect risk in sovereign debt markets and act.

Outlining the latest tranche of measures, Internal Market Commissioner Michel Barnier said: “No financial market can afford to remain a wild west territory. No player, no market, no territory must remain outside supervision.”

Short selling is the practice of speculators selling securities they do not own with the intention of buying it back at a later point – frequently having acted to devalue the stock. In naked short selling, the seller has not informed the owner he is “borrowing” it.

Under the proposal, all such actions will have to be flagged so that regulators know which transactions are short and investors will have to disclose significant net short positions at 0.2% of issued share capital to the regulator and to the market if it reaches 0.5%.

This should allow regulators to detect any developing risks to the stability of sovereign debt markets, including on those obtained through sovereign credit default swaps, which is regarded as insurance against the risk of default.

In exceptional circumstances regulators would have the power to restrict or ban short selling – a power that varies greatly between member states at present.

National regulators will also be able to restrict short selling until the end of the next trading day on a financial instrument that falls significantly in a day.

“We have to limit the risks of this hyper speculation by shedding light, by forcing people to be transparent. We have to know on all of these markets with the Americans and other regions, who is doing what,” Commissioner Barnier said.

Information on over-the-counter (not through an exchange) derivatives contracts under a second proposal would be reported to trade repositories and be accessible to supervisory authorities.

More information will also be made available to all market participants and standard over the counter derivative contracts will be cleared through central clearing houses to reduce the risk of one party defaulting on the contract.

Dutch MEP Corien Wortmann-Kool, EPP vice-president economy, welcomed the proposals but the smaller Green group said they do not go far enough. The InternationalSecurities Lending Association, a lobby group for the industry, warned it would increase costs for investors.