8 Financial services
| (31956)
13840/10
COM(10) 482
+ ADDs 1-2
| Draft Regulation on short selling and certain aspects of credit default swaps
|
| Legal base | Article 114 TFEU; co-decision; QMV
|
| Department | HM Treasury
|
| Basis of consideration | Minister's letter of 3 November 2010
|
| Previous Committee Report | HC 428-iv (2010-11), chapter 3 (20 October 2010)
|
| Discussion in Council | Not yet known
|
| Committee's assessment | Politically important
|
| Committee's decision | Not cleared, further information requested
|
Background
8.1 The Commission held a four week public consultation on short
selling,[22] during June
and July 2010, following both the various restrictions on short
selling imposed by most Member States in the autumn of 2008 and
the concerns expressed by some governments about the possible
role played by credit default swaps in relation to the prices
for Greek sovereign bonds in the spring of 2010.[23]
In September 2010, with this draft Regulation, the Commission
proposed introduction of a number of permanent measures, as well
as some temporary measures to be employed in adverse circumstances,
in relation to the short selling of financial instruments.
8.2 When we considered this proposal, in October
2010, we noted that it was clear that the Government had, with
good reason, considerable reservations about it, reservations
which we shared. However before considering the document further,
which we thought we were likely in due course to recommend for
debate, we asked to hear from the Government about:
- discussion of the draft Regulation
in the Council working group, particularly in relation to the
Charter of Fundamental Rights, to the potential for fiscal consequences
of European Securities and Markets Authority interventions in
sovereign debt markets, to the lack of an evidence base for the
proposal and to the unquantified cost of the risks being addressed;
and
- representations made to the Government by UK
stakeholders.
Meanwhile the document remained under scrutiny.[24]
The Minister's letter
8.3 The Finance Secretary to the Treasury (Mr Mark
Hoban) reports that:
- the Presidency held Council
working groups meetings on 6 and 20 October 2010;
- in relation to the Charter of Fundamental Rights,
several Member States have noted that certain provisions under
the proposal may give rise to issues under Article 17 (right to
property), specifically those proposals which would give competent
authorities (and the European Securities and Markets Authority)
the power to prevent natural or legal persons from entering into
transactions relating to financial instruments in certain circumstances;
- a number of Member States, including the UK,
have raised concerns that the Commission proposals extend to sovereign
debt and that the European Securities and Markets Authority would
have powers to intervene in sovereign debt markets;
- this is on the basis that such measures could
increase volatility and impair the liquidity of sovereign debt
markets and thereby impair the ability of governments to easily
raise funds and increase the costs of raising funds;
- in response, the Commission and the Presidency
have requested written representation from Member States on the
fiscal implications of the proposals as they relate to sovereign
debt;
- this issue was discussed at the 25 October 2010
meeting of the Economic and Financial Committee's Sub-Committee
on Bonds and Bills by Member States' debt management authorities
— most interventions on this matter questioned the need
for and the efficacy of the proposed Regulation with regards to
sovereign debt markets; and
- a number of Member States have also raised the
issue of the lack of evidence to justify the Commission's proposal,
in particular as it relates to sovereign debt, and to the unquantified
cost of the risks being assessed — the Presidency has acknowledged
that these issues need to be considered very carefully.
8.4 On representations the UK industry has made to
the Government, the Minister says that:
- the Treasury, in conjunction
with the Financial Services Authority, has so far held two stakeholder
meetings with each of the main trade associations to discuss the
issues generally and has met twice with the Gilt Edged Market
Makers (GEMMs) to consider the proposals as they related
to sovereign debt measures;
- the meetings set out the timing of the negotiations
and possible next steps, followed by detailed discussion around
the key issues of sovereign debt, the European Securities and
Markets Authority, the restrictions around naked short selling,
the marking regime and buy-in and fines for late settlement, with
even more discussion with the GEMMs on the implications for sovereign
debt;
- the industry was very supportive of the Government's
position and it had a helpful discussion around the wording of
the primary market exemption;
- the industry has also made direct representations
to the Commission on the issues; and
- the Treasury is working closely with the Debt
Management Office and the GEMMs to strengthen our position in
the Government's representations to the Commission and
the Presidency.
Conclusion
8.5 We are grateful to the Minister for this interim
account of developments on this draft Regulation and for the information
about the Government's consultations. We look forward to hearing
in due course about further progress in the negotiations. At that
stage we may wish to recommend the debate we have already foreshadowed.
But meanwhile the document remains under scrutiny.
22 The practice of selling assets that have been borrowed
from a third party with the intention of buying identical assets
back at a later date to return to the lender and with the hope
of profiting from a decline in the price of the assets between
the sale and the repurchase. Back
23
A sovereign credit default swap is a contract in which one party
pays a fee to another party in return for compensation or payment
in the event of the sovereign experiencing a specified credit
event (such as where a sovereign repudiates or declares a moratorium
on paying its debt). Back
24
See headnote. Back
|
