Speculation against the shares of major European banks during the financial crisis and current speculation on sovereign debt of Euro-zone countries have convinced the European Commission to propose a curb on these practices.
The European Commission has in particular proposed to restrict naked short selling i.e. the sale of securities that are not owned and have not been borrowed. On sovereign debt, the regulation proposes to increase the transparency of these markets and to allow in times of crisis to restrict or ban the use of sovereign credit default swaps (CDS) – the financial products that were supposed to hedge against the risk of default of a state but are today mainly used to speculate on the default of a state.
A Parliament majority strengthened the initial proposal of the European Commission by limiting the use of credit default swaps to hedging, and therefore introducing a ban of speculative transactions based on CDS.
The final text was approved by the Parliament on 15 November 2011 and is expected to be formally endorsed by the Council of Finance Ministers (ECOFIN) soon. The new rules will enter into force on 1 November 2012.
(text updated 19 December 2011)
11 July 2011: Finance Watch published a short paper entitled Why sovereign CDS do not lower sovereign funding costs
19 Oct 2011: Press Release – Comment on EU permanent ban on naked CDS
