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EU to propose short-selling rules

2010-09-15 08:26:45

The European Commission is set to publish draft rules on trading in complex

financial products, widely blamed for causing economic instability.

The aim is to monitor the derivatives market - products used to make bets on

investments without buying them.

Officials also want to assess the extent of short-selling, when traders bet on

share prices falling.

The commission is expected to suggest boosting national regulators' powers.

Derivatives and short-selling are viewed by some as contributing to the

eurozone debt crisis, which led to major market instability and drove the euro

to a four-year low.

In May this year, Germany made a surprise decision to ban some types of

short-selling of financial products.

It is hoped that common standards across the EU will restore confidence in the

financial markets.

Transparency

Short-selling is a technique that sees investors borrow an asset, and then sell

it on to the market.

Traders using this technique bet that the price of the asset will have fallen

by the time they have to buy it back in order to return what they borrowed.

European single market commissioner Michel Barnier wants to enforce EU-wide

regulations that will make investors disclose more details of their so-called

"short positions" in shares - caused by short-selling - to a central database.

The suggested new rules are also expected to include a requirement that these

trades go through a central clearing house so everyone can be certain the

investors have enough cash to pay up if they lose the bet.

Mr Barnier has, however, underlined the fact that short-selling itself can be

useful and legitimate, but that it can become a problem when people

deliberately manipulate a market.

"In some situations it can be used in an abusive fashion to drive down the

price of financial instruments can contribute to disorderly markets and,

especially in extreme market conditions, can amplify price falls and have an

adverse effect on financial stability," the commission said in a public

consultation document earlier this year.

The full details of the suggested regulations will be revealed by Michel

Barnier on Wednesday morning.

The proposals will then have to be approved by the European Parliament and the

Council of Ministers before they can become law.