Brussels moves on curbing shorting debt, mulls new bank tax

Brussels has provoked anger in the financial community by moving closer to curtailing shorting activities of global hedge funds, and considering taxing transactions by EU banks.

The European Parliament’s Economic and Monetary Affairs Committee has voted to back the Parliament’s plans to ban naked short sales of sovereign debt via credit default swaps, and to oversee more tightly shorting shares in EU companies.

Separately, the Parliament passed a report advocating financial transactions by EU banks be taxed at a rate up to 0.05%, raising up to EUR 200bn a year.

Brussels’ moratorium on short selling sovereign debt without also having long positions on that debt was widely panned as impracticable and damaging to credit markets.

The Parliament’s proposal to ban the activity must still be reconciled with views of EU member states – suggesting weakening of the moratorium could be on the cards.

French business school Edhec Risk Institute said yesterday regulators would not be able to identify long positions that CDS hedges were covering, and countries would have difficulty managing interest rate risk on their debt actively.

Financiers will be barred from hedging against default of entities they supported that did business with sovereign nations, Edhec continued.

Brussels also voted to force short sellers of EU equities to cover their positions within one day, and to tell regulators when shorts hit 0.2% of a company’s shares.

Plans to force public disclosure at 0.5% – also criticised by hedge fund practitioners as counterproductive – have been dropped.

The proposal for a ‘Tobin tax’ on EU banks’ financial transactions came from Greek Socialist Anni Podimata, and was backed by the Economic and Monetary Affairs Committee.

As it was not introduced by the European Commission, it carries no legislative weight, but the Commission is also weighing up such a levy.

However, such a charge would require consent of member states to be enacted, and would be unlikely to pass into EU law unless it were also adopted internationally.

David Walker

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