Commission consults on short selling and Credit Default Swaps
14 June 2010
The proposed measures aim to empower the Member States in reducing risks to financial stability arising from short selling and Credit Default Swaps, as well as to facilitate co-ordination between Member States and ESMA in emergency situations.
The purpose of the document is to consult market participants, regulators and other stakeholders on the options being considered by the Commission services for a forthcoming legislative proposal dealing with potential risks arising from short selling and Credit Default Swaps.
The intention of the measures is to:
· ensure that Member States have the power to act to reduce systemic risks and risks to financial stability and market integrity arising from short selling and Credit Default Swaps;
· facilitate co-ordination between Member States and the European Securities Markets Authority (ESMA) in emergency situations;
· increase transparency on the short positions held by investors; and
· reduce settlement risks linked with uncovered or naked short selling.
Short selling is the sale of a security that the seller does not own, with the intention of buying back an identical security at a later point in time in order to be able to deliver the security. Short selling can be divided into two types:
1.’Covered’ short selling, where the seller has borrowed the securities, or made arrangements to ensure they can be borrowed, before the short sale.
2.’Naked’ or ’uncovered’ short selling, where the seller has not borrowed the securities at the time of the short sale, or ensured they can be borrowed.
In addition to short selling on cash markets, a net short position can also be achieved by the use of derivatives, including Credit Default Swaps (CDS). For example, if an investor buys a CDS without being exposed to the credit risk of the underlying bond issuer (a so-called ’naked CDS’), he is expecting, and potentially gaining from, rising credit risk. This is equivalent to short selling the underlying bond.
Comments deadline is 10 July 2010.
© European Commission
