European Economic and Social Committee
INT/542
Short Selling
Brussels, 11 February 2011
RECORD OF THE PROCEEDINGS
of the
European Economic and Social Committee
on the
Proposal for a Regulation of the European Parliament and of the Council on Short Selling and
certain aspects of Credit Default Swaps
COM(2010) 482 final – 2010/0251 (COD)
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468th plenary session,
held in Brussels
on 19 and 20 January 2011
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Meeting of 20 January 2011
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Agenda item 14
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99 rue Belliard - B-1040 Brussels - Tel. +32 (0)2 546 90 11 - Fax +32 (0)2 513 48 93 - Internet http://www.eesc.europa.eu
EN
-1The president moved that the Committee turn to agenda item 14 - adoption of an opinion on the
Proposal for a Regulation of the European Parliament and of the Council on Short
Selling and certain aspects of Credit Default Swaps
COM(2010) 482 final – 2010/0251 (COD).
The preliminary work had been carried out by the Section for the Single Market, Production and
Consumption (president: Mr Cassidy). The rapporteur was Mr Morgan.
In accordance with Rules 20 and 57(1) of the Rules of Procedure, the European Economic and Social
Committee appointed Mr Morgan as rapporteur-general.
The rapporteur-general, Mr Morgan, presented the draft opinion.
Mr Duttine, Mr Pegado Liz, Mr Longo, Mr Iozia, Mr Cedrone and Mr Würmeling took the floor
to raise the following points:
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Economic benefits of sovereign debts;
Piecemeal, not coordinated approach proposed by the Commission;
Appeal to accept compromise;
Call for transparency and limitation of speculation;
Highly political issue;
Insurance of CDS should be covered that insured citizens should get money back at a certain
price.
The meeting then turned to an examination of the opinion based on ten amendments proposed by
Mr Iozia, Mr Gkofas, Mr Longo, Mr Nicosevici, Ms Nietyksza and Mr Pegado Liz.
a)
Amendments 5, 6, 7:
Point 2.5
Delete this point:
"2.5 On 18 September 2008, during the banking crisis, the UK Financial Services
Authority (FSA) prohibited the short selling of shares in publicly-quoted financial
companies until 16 January 2009. Many other countries, including the USA, imposed
similar restrictions."
Reason
The three points 2.5, 2.6, 2.7 want to demonstrate that regulation on short selling is useless
and damaging the interest of market participants, but they do not take into account the broader
interest of citizens, when naked short selling and naked CDS are used against a sovereign
debt or only for speculation, against the interest of real economy.
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-2Point 2.6
Delete this point:
"2.6 In January 2009, the London Stock Exchange gave evidence to the House of
Commons that continuation of the ban on short selling would have been both ineffective
in countering concerns about market volatility, and damaging to the wider interests of
market participants, increasing their costs and removing opportunities for investors to
generate revenues from stock lending, potentially further undermining the attractiveness
of affected stocks."
Reason
See amendment 5.
Point 2.7
Delete this point:
"2.7 The circumstances of September 2008 can only be described as a ''Black Swan''1
event. The toxicity of the sub-prime derivatives, the viral nature of the cancer and the
enormity of the melt down necessarily provoked action by regulators but the underlying
problem was not short selling. No ban could disguise the fact that bank balance sheets
had been destroyed by the sub-prime derivatives they held."
Reason
See amendment 5.
The rapporteur proposed 2 new paragraphs as compromise that was accepted by the authors of the
amendments and by the assembly:
''2.5
In September 2008, days after the Lehman default, the UK prohibited the short selling
of shares in publicly-quoted financial companies. Many other countries, including the USA,
imposed similar restrictions, but for varying time periods. The new EU regulation will avoid
any repetition of these disorderly measures.
2.6
The toxicity of the sub-prime derivatives, the viral nature of the cancer and the
enormity of the melt down necessarily provoked action by regulators, even though their
impact on the course of the crisis is debatable. It is difficult to envisage a similar future event,
but in any case the framework now exists for an orderly response by supervisors and
regulators.''
1
The theory of Black Swan events was developed by Nassim Nicholas Taleb to explain the disproportionate role of high-impact,
hard to predict, and rare events that are beyond the realm of normal expectations. In other words, a Black Swan event is when the
impossible happens.
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-3b)
Amendment 8:
Point 2.12
Modify:
"2.12 CDS related to sovereign debt have been the focus of eurozone angst as the
sovereign debt crisis has erupted. The economic and social dimensions of this crisis,
caused by naked CDS too, are of enormous concern to the EESC. It seems that
masochistic austerity programmes are scheduled to be inflicted in one Member State after
another like so many dominoes falling. The manifestation of the crisis is economic but the
problem is political. For example, the structure of the eurozone removes from Ireland the
freedom with which Iceland is solving its problems. A political solution is needed."
Reason
The naked CDS on sovereign debt played and are playing a very negative role on the stability
of some Member States in the euro zone. The regulation aims to avoid speculation from this
market. The problem continues to be political if the EU will not regulate it seriously. The
EESC has always supported and actually supports the regulation effort of the Commission. It
is unfair and incorrect to consider the austerity programmes ''masochistic'', when millions of
European are suffering for them caused by speculation and by political incapacity.
The rapporteur proposed to delete the whole paragraph 2.12 as compromise that was accepted by the
authors of the amendments and by the assembly.
c)
Amendments 9 and 10:
Point 2.14
Delete point 2.14:
"2.14 The European Commission investigation into possible problems with speculative
trading of credit default swaps on Greek sovereign debt in the wake of the country's crisis
found few serious flaws. Traders and banks involved in the swaps market have insisted
that moves in sovereign CDS markets generally were due to banks protecting their
exposures in peripheral sovereign debt. CDS markets are very small (circa 5%) in
comparison with the sovereign bond markets they protect."
Reason
Points 2.14 and 2.15 try to demonstrate that CDS are simple and neutral tools of the market. It
is not exact. It is clear that they amplify the fall of a quotation price.
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-4Point 2.15
Delete point 2.15:
"2.15 The focus on CDS deals with the symptom of the problem not the cause. The cause
is the unresolved political dilemma in which a currency union is faced with a debt crisis.
The dilemma has caused economic uncertainty. Lenders need to cover their risks.
Opportunists seek to profit. It is difficult to separate one from the other. Bankers may be
profiting, but eurozone governments are giving them every opportunity to do so. No ban
can disguise the incompatibility between the German economy and certain peripheral
economies, nor the impasse in which various peripheral economies now find themselves.
No ban can remove the remaining concerns about bank balance sheets, notwithstanding
the results of the 2010 stress tests."
Reason
This point undermines the value of the regulation on CDS. There are some political
evaluations that are not consistent with the opinion on the regulation and an incomprehensible
sentence on incompatibility between the German economy and certain peripheral economies.
It does not add any value to the opinion, but generates confusion and uncertainty.
The Rapporteur proposed to replace 2.13, 2.14 and 2.15 by two new paragraphs as compromise that
was accepted by the authors of the amendments and by the assembly:
''2.12 In May 2010, Germany announced a ban on naked CDS referencing Euro zone
countries, as well as naked short sales of Euro zone sovereign debt and equities of certain
German financial institutions. The regulator cited the ''extraordinary volatility of debt
securities'' to justify the move. This action took other Member States by surprise and upset the
markets. As with short selling of equities, the new EU regulatory powers and provisions will
prevent a repetition of such unexpected unilateral action in future.
2.13
While the focus on CDS is justified, there is still a danger that it deals with the
symptom of the problem not the cause. The cause is the unresolved political and economic
dilemma in which a currency union is faced with a debt crisis. The dilemma has caused
economic uncertainty. Lenders need to cover their risks. Opportunists seek to profit from the
uncertainty. It is difficult to separate one from the other. Bankers may be profiting, but
eurozone governments are giving them every opportunity to do so.''
d)
Amendment 1:
Point 1.3
Modify:
"1.3 In general, the EESC would expect Member State Competent Authorities to
exercise these powers in the first instance. ESMA coordination of Member State
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-5responses meets an existing need and will be highly beneficial. The EESC would expect
direct ESMA intervention to be exceptional and we look to the governance as foreseen in
of ESMA under article 24 of the proposal for a regulation and EU legal structures to
ensure that any such interventions are driven by economics and not politics."
Reason
Article 24 of the proposed regulation already limits in specific cases the role of ESMA,
composed by all the national authorities. Its decision will be taken only in application of the
law. It is not a political body.
The rapporteur accepted the amendment.
e)
Amendment 2:
Point 1.5
Amend:
"1.5 The EESC welcomes the proposal to formalise within a harmonised framework
powers to place temporary restrictions on short selling when market stability is
threatened. The EESC notes that objective measures of market instability remain to be
defined. The current threshold for "significant price falls" of 10% is could be too low for
most some instruments."
Reason
10% threshold is adopted by many national authorities, in different cases, to stop the
negotiations on a share.
The rapporteur accepted the amendment.
f)
Amendment 3:
Point 1.7
Amend:
"1.7 The EESC considers that the proposed settlement regime for naked short selling to
could be too inflexible since there is no evidence that the conceptual risks are material.
more effective if tThere should be at least intra-day flexibility to cover short positions.
The rather more flexible US model should provide the necessary assurance without
putting market operators at a disadvantage."
Reason
The sentence is too inflexible, and not demonstrated.
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-6-
The rapporteur accepted the amendment.
g)
Amendment 4:
Add a new point 1.10
"1.10 CDS related to sovereign debt have been the focus of eurozone angst as the
sovereign debt crisis has erupted. The economic and social dimensions of this crisis,
caused by naked CDS too, are of enormous concern to the EESC. The Committee
welcomes the regulation proposal and agrees with the Commission considering that
''uncovered short selling of shares and sovereign debt is sometimes viewed as increasing
the potential risk of settlement failure and volatility. Measures relating to sovereign debt
and sovereign credit default swaps including increate transparency and restrictions on
uncovered short selling should impose requirements which are proportionate and at the
same time avoid an adverse impact on the liquidity of sovereign bond markets and
sovereign bond repurchase (repo) markets'', as stated in Recital 16 and 17 of the
Explanatory Memorandum of the regulation."
Reason
It is crucial to avoid to sovereign debt all the negative consequences that could come by
speculation. The naked CDS on these securities should be regulated with a specific act by
national regulators.
The rapporteur proposed the following compromise that was accepted by the authors of the
amendment and by the assembly:
"1.10 CDS related to sovereign debt have been the focus of eurozone angst as the sovereign
debt crisis has erupted. The economic and social dimensions of this crisis, caused by naked
CDS too, are of enormous concern to the EESC. The Committee believes that naked CDS
trading amplified the crisis and so it welcomes the regulation proposal. The Committee
endorses and agrees with the Commission's view, contained in Recitals 16 and 17 of the
Explanatory Memorandum of the regulation considering that ''uncovered short selling of
shares and sovereign debt is sometimes viewed as increasing the potential risk of settlement
failure and volatility. Measures relating to sovereign debt and sovereign credit default
swaps including increate transparency and restrictions on uncovered short selling should
impose requirements which are proportionate and at the same time avoid an adverse impact
on the liquidity of sovereign bond markets and sovereign bond repurchase (repo) markets,
as stated in Recital 16 and 17 of the Explanatory Memorandum of the regulation''
h)
As part of the compromise, the rapporteur proposed
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to add a new paragraph at the end of section 1
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-7
''1.12
Taking account of the damage that out of control sovereign debt can cause to
all citizens, the EESC expects the EU to give a global lead in the future management of
sovereign debt.''
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to add a new paragraph at the end of section 2
''2.14
In the light of the above, and taking account of the damage that out of control
sovereign debt can cause to all citizens, the EESC expects the EU to give a global lead in
the future management of sovereign debt.''
This was accepted by the Assembly.
i)
As a consequence of the compromise on amendment 9, the rapporteur proposed the
following drafting change that was accepted by the assembly:
Point 1.6
"1.6
Subject to the provisions in para 1.5 above, and in the light of the Commission’s
enquiry (para 2.14 below) the Committee does not feel that an outright ban on naked CDS in
all circumstances is justified."
The opinion was adopted by 200 votes to four with seven abstentions.
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