Agreement struck on short-selling

Compromise deal aims to improve transparency.

Finance ministers have reached a compromise deal to limit and improve the transparency of two of the trading practices that have been most criticised in the wake of the financial crisis of 2007-08.

Ministers agreed a common approach to rules covering short-selling – a practice in which traders borrow a stock and sell it at a high price in the expectation of then buying it back at a lower price – and on the trade in credit-default swaps, a form of insurance that guarantees the creditworthiness of a loan.

Under the compromise reached on Tuesday (17 May), short-selling will be banned when a trader has not arranged to borrow the underlying stock at the time of sale, a practice known as naked short-selling.

This will not apply to the short-selling of government debt if the deal is made for the purposes of hedging.

Debt suspension

The ban on naked short-selling of sovereign debt can also be suspended if the liquidity of sovereign debt falls below a certain threshold.

Short trades will have to be notified either to the market regulator or, when a trade is more significant, to the markets themselves.

The legislation was proposed by the European Commission in 2010 to establish common rules on short-selling and credit-default swaps.

Several member states, including the UK and Germany, introduced bans on short-selling in 2008 at the height of the financial crisis, to prevent instability in financial markets.

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The common position agreed by finance ministers will form the basis for negotiations with the European Parliament, which has already taken a much tougher line, including proposing a ban on naked sales of credit-default swaps.