Proposals on short selling, credit default swaps and derivatives

The European Commission has made new proposals on short selling and credit default swaps, and on derivatives trading. The main points:

Short selling:

  • Measures to enhance transparency – at a lower threshold (0.2% of the issued share capital) notification of a short position would be made only to the regulator and at a higher threshold (0.5%) short positions would be disclosed to the market;
  • In exceptional situations, competent authorities (i.e. financial regulators) would have powers to impose temporary measures such as to require further transparency or to restrict short selling and credit default swap transactions;
  • Competent authorities are also given the power in the case of a significant fall in the price of a financial instrument or class of financial instruments to impose a very short restriction on short selling of the financial instrument;
  • Requirements for participation in naked short selling;
  • A measure adopted by the European Securities Markets Authority (ESMA) in accordance with is powers of intervention prevails over any previous measures taken by a competent authority.

CDS:

  • Greater transparency so that persons with significant naked CDS positions relating to sovereign debt issuers must notify regulators of their positions. This will enable regulators to monitor whether such positions are creating disorderly markets or systemic risks or being used for abusive purposes.
  • Powers for regulators to obtain information in individual cases about CDS transactions.
  • Powers of intervention in an exceptional situation for a competent authority to temporarily prohibit or restrict the use of CDS. Such measures would be temporary in nature and subject to coordination by ESMA.

Derivatives trading:

  • Trades in over-the-counter (OTC) derivatives in the EU will have to be reported to central data centres, known as trade repositories;
  • OTC derivatives that are standardised (i.e. they have met predefined eligibility criteria), such as a high level of liquidity, would have to be cleared through central counterparties (CCPs);
  • Market participants must measure, monitor and mitigate this risk of human error, for example by using electronic means for confirming the terms of OTC derivative contracts.

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