The European Commission (EC) will propose new legislative measures on derivatives, including credit default swaps (CDS), and short selling on Wednesday 15 September.
The proposals follow a period of consultation on derivatives and short selling by both the EC and the Committee of European Securities Regulators (CESR), the body that harmonises regulation across Europe. The results of these consultations have been fed back to the EC's process for reviewing MiFID and enacting the financial sector resolutions made by the Group of Twenty (G20) industrialised and developing countries. On 2 June 2010, the EC announced it would be making good on its commitment to the proposed G20 financial reforms by enacting legislation between December 2010 and March 2011.
The EC will issue proposals that will establish common standards in the EU for short selling activities and CDS trading and another designed to ensure that derivatives trading becomes more safe and efficient. Internal market and services commissioner Michel Barnier will unveil the proposals at a press conference.
The proposals, if they follow the feedback to consultations, will advocate the disclosure of short positions to regulators, while supporting the reporting of OTC transactions via trade repositories or direct to regulators. The standardisation and exchange trading of OTC derivatives is core requirement of the G20, but an industry consensus on where the line is drawn has not been reached.
During the financial crisis of 2008-2009, short selling was seen as an accelerant in declining asset prices by many politicians and regulators, which has led to calls for a tougher regime to prevent market abuse. Trade in OTC derivatives, particularly CDS, proved to have been virtually unmonitored and manually administered before the crisis. As a result, a number of market participants were left unaware of their exposures to debt defaults. Regulators and politicians intend that the standardisation of derivative contracts will allow them to be electronically traded and administered, but industry bodies and market participants have warned that too much standardisation would impair their usefulness.