Documents considered by the Committee on 24 November - European Scrutiny Committee Contents

8 Financial services



COM(10) 482

+ ADDs 1-2

Draft Regulation on short selling and certain aspects of credit default swaps

Legal baseArticle 114 TFEU; co-decision; QMV
DepartmentHM Treasury
Basis of considerationMinister's letter of 3 November 2010
Previous Committee ReportHC 428-iv (2010-11), chapter 3 (20 October 2010)
Discussion in CouncilNot yet known
Committee's assessmentPolitically important
Committee's decisionNot cleared, further information requested


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.


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

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