Commentary: The Next Chapter in European Short-Sale Regulation
Traders Magazine Online News, August 23, 2010
European market regulators generally have taken a fairly benign view towards short selling. Nothing like the uptick rule has been imposed on any major European market center. In general, European market participants are not required to borrow stock, or otherwise commit to deliver it, when placing an order to short stock.
Stephen J. Nelson
From time to time, however, during periods of market stress, European regulators react in draconian fashion by prohibiting short sales in certain financial instruments altogether. When the financial crisis was tanking the stocks of banks and other financial institutions in 2008, the Financial Services Administration in London banned short selling in these stocks. The U.S. Securities and Exchange Commission responded in similar fashion, with some regret. But, while the U.S. prohibition lasted for a couple of weeks, London regulators kept the ban in place for months. In May of this year, German regulators imposed short sale bans on euro-denominated government bonds in reaction to the run on European sovereign debt precipitated by the crisis in Greece.
The London and German bans on short sales produced shock waves throughout the European Union and resulted in calls for pan-European regulation. In the wake of the London prohibition, the Committee of European Securities Regulators, as reported in this column, produced a "call for evidence" soliciting views on the need for short sale regulation. This led to a proposal to adopt certain disclosure requirements for short sale positions, which mimicked the rules instituted by the FSA after it relaxed its ban on short sales of financial institution stocks. However, CESR is only an advisory body, soon to be replaced with ESMA, the European Securities and Markets Authority, which is a first pan-European attempt to establish something like the SEC in Europe.
On June 14, on the heels of the German short sale ban, the European Commission--the source of all pan-European legislation--produced a "Public Consultation on Short Selling," which provided only about one month for public comment. Proposed legislation is expected by the end of summer.
Why the rush? In "Frequently Asked Questions," the Commission cited "political considerations."
The European Union is first and foremost an economic union. Its member states have agreed to surrender their authority over those economic issues that the Union preempts through European-wide legislation. In that way, the European member states have sought to preserve their sovereignty over most matters, while surrendering their economic interests to the greater good. The European Union is founded on the fear that without presenting a united economic front, Europe would fall behind the U.S.
As the history of nation building goes, the European Union is somewhat unique. In the past, national groups were formed primarily for defense against stronger, predatory neighbors. So, while the United States has as one of its goals "to promote the general welfare," this principle of union is preceded by the need to "insure domestic tranquility" and "provide for the common defense." Neither of these latter goals is part of the EU's brief.
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