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ESMA chairman warns against regulatory arbitrage over EU short-selling rules
May 26, 2011 by Charles Gubert
European Union (EU) rules curtailing the naked short selling of sovereign debt and bonds must not result in regulatory arbitrage among member states, according to Steven Maijoor, chairman of the European Securities and Markets Authority (ESMA).
Speaking at the International Capital Markets Association conference in Paris, Maijoor said the final details of the directive must be clear cut. He warned there could be confusion if naked short selling of sovereign debt and bonds was permissible in one member state but not another. “It is important to avoid complex and unclear accountabilities. This would risk slowing down the decision making while a decision to ban will typically require speed to be effective,” he said.
Draft proposals agreed by the European Council on May 17 said naked short selling of government shares and bonds would be banned. However, governments could ask for the ban on naked short selling to be lifted if liquidity drops below a certain threshold. The rules still need to be approved by the European Parliament, which in the past has called for a total ban on naked short selling much to the ire of hedge funds.
Some elements of the European Parliament believe that hedge funds or “speculators” exacerbated the Greek and European sovereign debt crisis in 2010 by naked short selling sovereign debt via credit default swaps (CDS). This, they say, pushed up the borrowing costs for those indebted nations. However, these claims have been rubbished by the European Commission. Its December 2010 report on sovereign CDS clearly stated that CDS spreads “were not leading indicators of sovereign bond yields and that the funds were not responsible after all.”
Maijoor also stressed investors needed more information about the risk profile of their hedge fund investments. “It will be important to achieve a balance between increasing investor protection while avoiding imposing undue costs on fund managers. At the same time, regulators will need to be provided with sufficient information on the activities of alternative investment fund managers. As such, it can only be beneficial for competent authorities to have greater visibility of this sector. However, we should be careful not to require information just for the sake of it,” he said.
ESMA will launch a public consultation in July about proposed changes to the way hedge funds, private equity vehicles and other alternative investment funds are regulated.