EU proposes to limit naked short sales

Brussels: Naked short sales of shares and government bonds may be limited by European Union proposals that say the practices cause a "disorderly market and possible systemic risks".

Under the proposed rules, traders would be required to submit proof they can access the underlying security to settle a trade designed to profit from falling prices, according to a European Commission document obtained by Bloomberg News. The rules would need approval of the full commission before being submitted to the Parliament and national governments.

The rules would bring the EU closer to the stance taken by Germany, where Chancellor Angela Merkel banned some naked short selling in May. Merkel and French President Nicolas Sarkozy argued that some bets against stocks and government bonds should be banned as the Greek debt crisis made markets more volatile.

Short selling

The UK Treasury said on Saturday that it opposed an EU-wide ban or curbs on naked short selling and that sovereign bonds should be excluded from efforts to limit short selling.

The draft rules would also force traders to notify EU regulators about "significant exposures in credit-default swaps that relate to EU sovereign debt issuers", according to the document. The rules wouldn't apply to company shares that principally trade on an exchange outside the EU.

The rules also will not apply to market makers because they play a "crucial role in providing liquidity to European markets" according to the draft. "Moreover, market makers do generally not take significant short positions except for during very brief periods," the document said.

Meanwhile, European Central Bank President Jean-Claude Trichet extended emergency lending measures for banks into 2011, remaining in crisis mode as the risk of a renewed US recession puts the euro-area's rebound in jeopardy.

The ECB will keep offering banks unlimited one-week and one-month loans until at least January 18, Trichet told reporters yesterday in Frankfurt. Trichet spoke after the ECB Governing Council set the benchmark lending rate at 1 percent for a 17th month, as predicted by all 57 economists in a Bloomberg News survey.

The ECB is trying to cement a euro-region recovery threatened by the possibility of a renewed US recession and concerns about the fiscal health of some euro-region nations.