EU Close to Deal on Shortselling Restraints

EU policymakers are close to a deal that would ban naked credit default swaps for sovereign debt. Announcement expected next Tuesday.

Some big hurdles must be jumped over to complete the whole package, including: the “generosity” of the exemptions; opt out by national regulators for short periods; and, the definition/process for determining “naked,” or uncovered, short selling.

For equities, a permanent ban, too, would be placed on on naked, or uncovered, short selling and new disclosure requirements of short positions (already in place in France, for example) would be established throughout the EU.

“Trades would only be considered naked if the underlying stock was not owned by the trader or if the trader had not made arrangements to borrow it in time to settle the deal. The definition of the steps traders need to take to borrow shares is still under discussion,” F.T. reports.

And, according to Reuters ( “EU hopes for deal on short-selling, CDS curbs” ) language to distinguish covered and uncovered short positions: “Shorting stocks would only be allowed if prior arrangements have been made to borrow the stock to ensure prompt settlement of trades or that there is reasonable certainty the stock will be available.”

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