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Naked Short-Sales, OTC Derivatives Face EU Limits (Update2)
2010-09-15 11:48:07.321 GMT
(Updates with collateral, capital requirements starting in
eighth paragraph.)
By Ben Moshinsky
Sept. 15 (Bloomberg) -- Naked short-sales of shares and
government bonds would be limited and some over-the-counter
derivatives trades forced through clearinghouses under European
Commission proposals to safeguard financial markets.
Frequent traders of some OTC derivatives in Europe will be
forced to use central clearinghouses to close sales, while naked
short-sellers would be required to submit proof they can access
the underlying security to settle a trade designed to profit
from falling prices, under two separate initiatives announced in
Brussels today.
"In distressed markets, short selling can amplify price
falls, leading to disorderly markets and systemic risks,"
Michel Barnier, the European Union's financial services
commissioner, said in an e-mailed statement.
The rules on short-selling would bring the EU closer to the
stance taken by Germany, where Chancellor Angela Merkel banned
some naked short-selling in May. Merkel and French President
Nicolas Sarkozy argued that some bets against stocks and
government bonds should be curbed as the Greek debt crisis made
markets more volatile.
The EU bill on derivatives clearing is part of a package of
laws to strengthen regulation following the worst financial
crisis since the Great Depression. The plan is aimed at limiting
losses in the event of a default by a major counterparty.
'Wild West'
"No financial market can afford to remain a Wild West
territory," Barnier said. "OTC derivatives have a big impact
on the real economy, from mortgages to food prices."
The commission, the executive arm of the 27-nation EU,
announced the proposals for discussion by the European
Parliament and member states. U.S. and European regulators are
pushing for tighter oversight of the $605 trillion over-the-
counter derivatives market.
To encourage traders to use central counterparties, OTC
derivatives not cleared centrally will face higher collateral
requirements as well as increased capital charges, to be
outlined in a revision of the EU's rules on bank capital at the
end of the year.
The capital rules will implement agreements made by the
central bankers and regulators of the Basel Committee on Banking
Supervision announced on Sept. 12.
Banks are "concerned" about the collateral and capital
requirements, the European Banking Federation, a Brussels-based
trade group, said in an e-mailed statement.
'Crucial Points'
"These measures are crucial points in the strict
regulatory agenda banks are facing and must be carefully
weighed, both individually and as a whole," Guido Ravoet,
secretary general EBF, said in the statement.
The proposed law on short-selling would require traders to
notify authorities of any short position exceeding 0.2 percent
of issued capital, and tell the market of positions exceeding
0.5 percent.
"We have a concern about public disclosure at low
thresholds," Kevin McNulty, chief executive of the
International Securities Lending Association, said in a
telephone interview. "At that level, it artificially reduces
short-selling."
The rules also give regulators emergency powers to require
more disclosure or temporarily ban short selling and credit-
default swaps.
'Therapeutic Effect'
"These proposals will have a very therapeutic effect,"
said Michael Greenberger, a professor at the University of
Maryland School of Law, said in a telephone interview earlier
this week. "The problems speculators pose in markets far
outweigh concerns about liquidity and financial costs. We have
had too many systems without costs that have had a calamitous
effect on our financial system."
In the U.S., regulators and Congress rejected a proposed
ban on naked swaps last year, with House Financial Services
Committee Chairman Barney Frank saying "there was concern that
a broad grant to ban abusive swaps would be unsettling," and
U.S. Treasury Secretary Timothy F. Geithner saying he doesn't
think such a measure would have merit.
Short sellers borrow assets and sell them, betting the
price will fall, buying them later and pocketing the difference.
In naked short-selling, traders never borrow the assets, so
betting is unlimited.
Credit-default swaps are derivatives that pay the buyer
face value if a borrower -- a country or a company -- defaults.
In exchange, the swap seller gets the underlying securities or
the cash equivalent. Traders in naked credit-default swaps buy
insurance on bonds they don't own.
Data Bank
The rules on OTC derivatives would force traders to record
contracts with a central data bank known as a trade repository,
and hand powers to European regulators to decide what type of
derivatives must be cleared by a central counterparty.
A derivative is a contract between two parties linked to
the future value or status of the underlying asset to which it
refers, including the development of interest rates or price of
commodities such as oil or wheat. An OTC derivative is one
privately negotiated between two parties, rather than being
traded on an exchange.
The rules on OTC derivatives would force traders to record
contracts with a central data bank known as a trade repository,
and hand powers to newly formed pan-European regulators to
decide what type of derivatives must be cleared by a central
counterparty and collateral levels.
Clearinghouses operate as central counterparties for every
buy and sell order executed by their members, who post
collateral, reducing the risk that a trader defaults on a deal.
For Related News and Information:
Top legal stories: TLAW <GO>
News on credit derivatives: NI CDRV <GO>
Credit Markets stories: TOP CM <GO>
Credit-Default Swaps Sector Graphs: GCDS <GO>
World Credit-Default Swaps Pricing: WCDS <GO>
Biggest Credit-Default Swaps Movers: CMOV <GO>
Bloomberg legal stories and filings: BLAW <GO>
European regulation news: TNI EUROPE RULES <GO>
News on the credit crisis: NI CRUNCH <GO>
Bailout and rescue programs: RESQ <GO>
--With assistance from Abigail Moses in London. Editors: Peter
Chapman, Christopher Scinta
To contact the reporters on this story:
Ben Moshinsky in Brussels at bmoshinsky@bloomberg.net;
To contact the editor responsible for this story:
Anthony Aarons at +44-20-7673-2227 or aaarons@bloomberg.net
