MercoPress. South Atlantic News Agency

EU Parliament curbs sovereign debt speculation and short selling limitations

Rapporteur Pascal Canfin: rules prove the EU can act against speculation

The European Parliament on Tuesday voted into law a regulation to curb short selling and trading in credit default swaps (CDS), a financial product for insuring against default.

The rules will impose much more transparency and virtually ban certain CDS trades, thereby making speculation on a country's default more difficult.

This is one of the key regulations pushed through by the Commission to tackle the financial crisis. Both short selling and CDS trading are accused of having fuelled market volatility, with CDS trades moreover having been widely blamed for potentially aggravating Greece's troubles.

Parliament obtained a ban on naked CDS trading (purchasing default insurance contracts without owning the related bonds). Purchasing Italian CDS, for example, will now be possible only if the buyer already owns Italian government bonds or a stake in a sector highly dependent on the performance of these bonds, such as an Italian bank – in the event of an Italian default, Italian banks would certainly suffer significantly.

The sole exception is an option for a national authority to lift the ban for a maximum of 12 months in cases where its sovereign debt market is no longer functioning properly, and then possibly renew it for a further 6 months. Even this possibility would be closely circumscribed, because the text specifies a limited number of indicators which could justify the regulator's action. Moreover, within 24 hours, the European Securities and Markets Authority (ESMA) would publish an opinion on its web site as to the utility of suspending the ban. A negative opinion from ESMA would have political weight.

Welcoming the ban, rapporteur Pascal Canfin (Greens, FR) said: “These rules prove that the EU can act against speculation when the political will is there. This rule will make it impossible to buy CDS for the sole purpose of speculating on a country's default.”

Another key to strengthening the Commission proposal is stepping up reporting requirements. A lack of information was one of the main problems for supervisors before the crisis. The extra information to be provided to national and European supervisors under the regulation will allow them to carry out their preventive work better, by alerting them earlier to potential risks. For example, supervisors would be informed of large short positions as soon as these positions account for 0.5% of the issued capital.

The resolution was passed with 507 votes in favour, 25 against and 109 abstentions. It must be formally approved by the Council in the coming weeks, and will enter into force in November 2012.