U.K. Fights ‘Unpredictable’ EU Power to Ban Short Selling

Photographer: Simon Dawson/Bloomberg

Britain’s Chancellor of the Exchequer George Osborne last week said that plans being discussed by 11 other EU nations for a common financial transactions tax were “unlawfully extraterritorial” and “poorly designed.” The country started a legal challenge over the draft measures in April. Close

Britain’s Chancellor of the Exchequer George Osborne last week said that plans being... Read More

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Photographer: Simon Dawson/Bloomberg

Britain’s Chancellor of the Exchequer George Osborne last week said that plans being discussed by 11 other EU nations for a common financial transactions tax were “unlawfully extraterritorial” and “poorly designed.” The country started a legal challenge over the draft measures in April.

The U.K. asked the European Union’s top court to quash the “wide” and “unpredictable” powers of an EU agency to ban short selling in the latest skirmish over the regulation of financial services.

The U.K. told the EU Court of Justice that the European Securities and Markets Authority received discretionary decision-making powers “on a whole series of questions on which reasonable experts may disagree.”

The U.K. has also clashed with the EU over a range of measures that allow the EU greater regulation of banks, including bonus curbs and a financial transaction tax. U.K. Prime Minister David Cameron has promised to seek a new settlement with the EU, amid a rising tide of opposition that saw the U.K. Independence Party, which advocates a divorce from the bloc, gain seats in local elections last month.

“Without wanting to sound grandiose about it, we bring this claim because the U.K. takes the rule of law seriously and because of the wider implications of this case,” Jemima Stratford, a lawyer for the U.K., told the Luxembourg-based EU court today. ESMA will have the power to ban short selling in a “highly uncertain and subjective” manner, she said.

ESMA, which brings together markets regulators from the 27-nation EU, was handed an upgraded mandate to police short selling last year as part of a bid by EU lawmakers to make markets less volatile and tame speculation by traders blamed for driving up governments’ borrowing costs.

Declining Markets

Short sellers seek to profit on declining markets by selling borrowed shares or bonds, on the belief their price will fall, then replacing them with securities bought at a lower price.

ESMA is one of three EU-level agencies set up to coordinate oversight of securities markets, banks and insurers in the wake of the collapse of Lehman Brothers Holdings Inc.

The European Commission, the EU’s executive agency, said that ESMA’s powers only apply in “exceptional circumstances.”

“The objective of those interventions is clearly one to ensure financial stability,” said Bernardus Smulders, a lawyer for the Brussels-based commission. “These powers are framed in such a way that they cannot balance conflicting policy objectives, they can only make a technical assessment” and will then apply measures “which will lead to ensure financial stability.”

Policy Driven

Anders Neergaard, a lawyer for the European Parliament, rejected U.K. arguments that ESMA’s powers are “policy driven.”

ESMA must “be able to show that there is a threat” to financial markets before taking any decisions, Neergaard told the court’s 15-judge panel, which is reserved for the most important cases.

The U.K. has often found itself on the defensive in EU discussions on financial regulation. The nation, which lacks a veto on financial laws, was the sole dissenting voice in March opposing a deal to ban bonuses more than twice fixed pay.

Britain’s Chancellor of the Exchequer George Osborne last week said that plans being discussed by 11 other EU nations for a common financial transactions tax were “unlawfully extraterritorial” and “poorly designed.” The country started a legal challenge over the draft measures in April.

Wider Significance

The case “could have much wider significance” than just for ESMA, said Alexandria Carr, a lawyer in the London office of Mayer Brown, who attended today’s hearing. “It remains to be seen whether the court will seize the opportunity to restate the parameters around the decisions of EU agencies.”

The U.K. is also suing the European Central Bank over policies that it says push clearing of some derivatives away from London and into the euro area, and has grappled with other states on topics ranging from oversight of hedge funds to how much power the Brussels-based commission should have to police bank capital.

Niilo Jaeaeskinen, an advocate general at the court, said he will issue his non-binding opinion on the case by Sept. 12. The court follows such advise in a majority of cases.

The case is: C-270/12, United Kingdom of Great Britain and Northern Ireland v. Council of the European Union, European Parliament.

To contact the reporter on this story: Stephanie Bodoni in Luxembourg at sbodoni@bloomberg.net

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net

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