BBC News, 7 March 2011
MEPs have voted in favour of restricting the practice of "naked" short selling.
|The directive will still have to be negotiated with|
the Commission and the European Council
Short-sellers usually borrow shares or bonds, sell them, then buy them back when the stock falls - pocketing the difference.
"Naked" short-selling is when a trader sells financial instruments he has not yet borrowed.
A new directive places conditions on the use of credit defaults swaps (CDS) - a form of government debt insurance.
Under the new rules those traders who want to "short" a CDS would have to own the underlying government bond before they could sell it.
Some MEPs argue that the practice of naked short selling exacerbated the financial crisis, with the borrowing costs of countries like Greece being driven up by "speculation" on government debt.
They argue that traders have an incentive to drive down the price of a share or bond - and thereby needlessly damage a company or an economy.
"This regulation takes one more step towards curbing speculation and improving transparency in the financial services sector," MEPs said in a statement.
Cost of borrowing
Others however argue that this form of short selling keeps assets liquid and performs a valuable secondary function of alerting the market when a stock or bond is incorrectly priced.
Andrew Baker, chief executive of AIMA - the hedge fund trade association - says that if if this directive were introduced it would have negative impact on global debt markets.
"Debt markets would be less efficient, liquid and transparent. The cost of borrowing would increase and the availability of credit to borrowers would decrease, with a concomitant negative impact on growth and jobs," Mr Baker said in a statement.
However the vote in favour of the proposed directive does not mean it will be immediately implemented.
It will still have to be negotiated with the European Commission and the heads of government in the European Council.