On 21 February 2012, the European Council adopted the short-selling regulation that includes an optional ban on naked credit-default swaps tied to sovereign debt. These new rules follow the agreement to ban “naked” credit default swaps (CDS) on sovereign debt in an attempt to curb what some policymakers see as Hedge fund bets on the euro zone crisis reached on 18 October 2011.
During the financial crisis, and more recently in the context of market volatility in euro denominated sovereign bonds, EU Member States reacted differently to Short selling that they believed was creating disorderly markets and systemic risks. Member States imposed a diverse range of emergency measures using varying powers, e.g. forbidding Short selling or naked Short selling of different types of financial instruments. A number of Member States imposed no measures at all.
This fragmented approach created difficulties and costs for market participants. It may also have led to competitive distortions and potentially regulatory arbitrage. The divergent approaches were undesirable from a single market perspective.
The new regulation adopted on 21 February 2012 is intended to address these issues, whilst acknowleging the role of Short selling in ensuring the proper functioning of financial markets, in particular in providing Liquidity and contributing to efficient pricing.