Proposals for legislative measures on uncovered, or naked, short selling of securities and the trade in derivatives - two crucial areas in the EU’s wholesale upgrade of financial legislation post-financial crisis - are open to response from interested parties until 10 July.

In June, the European Commission unveiled the two documents in the form of a questionnaire. David Wright, outgoing deputy director general of the internal market directorate general, said the Commission’s position in each of the areas is mostly established - but it is still mulling over certain other aspects.

The 25-page consultation on derivatives and market infrastructures, which is described as a working document (not a formal proposal) gives prominence to clearing of over-the-counter (OTC) derivatives. The document suggests two approaches - bottom-up and top-down.

In the bottom-up approach central counterparties (CCP) clearing houses would determine which types of contract require central clearing. They would send their suggestions to the ‘competent [national] authorities’ for approval by the proposed European Securities and Markets Authority (ESMA), which is set to replace the Committee of the European Securities Regulators (CESR) next year.

In the top-down approach, ESMA, together with the proposed, higher level, European Systemic Risk Board, would determine which contracts should potentially be subject to the clearing obligation. Here, the controversy is around financial ‘speculation’ and prudent hedging. Both the European Association of Corporate Treasurers (EACT) and Business Europe (the employers’ federation), express the oft-repeated worries of non-financial industry.

Richard Raeburn, chairman of the EACT, had already written to the Commission, stating: “Proposed reforms to the OTC derivatives market… will disadvantage many end users who rely on OTC derivatives to hedge underlying commercial exposures.” His colleague, Olivier Brissaud, says that EACT agrees with the Commission’s qualitative approach. However, in quantitative terms, setting a low threshold might suit some SMEs, but would not be acceptable to big corporates. Erik Berggren, at Business Europe, sums up this conundrum as “not so easy”.

Other reactions to the OTC derivatives market reforms come in two groups. The International Swaps and Derivates Association (ISDA) in a press statement said its focus is on “making derivatives safer” by improving transparency and strengthening counterparty risk management through the use of clearinghouses.

Martin Sjöberg, director of European affairs at the CFA Institute, agrees with the Commission’s line, pushing a pan-Europe approach on both derivatives and short selling. He says: “It is not logical to have a national ban on naked short selling in some EU countries, when you can simply move the transaction to London.”

A critical reaction to the Commission’s consultation documents comes from Corporate Europe Observatory (CEO), a campaign group targeting lobbying by the corporate world. CEO’s Kenneth Haar is critical of the drawn-out nature of Brussels pow-wowing with interest groups over final legislation. There have been calls for action to tighten these regulations for the last two years, he states. In the meantime, financial speculation has continued unfettered.

In fact, a not completely dissimilar line came recently from the European Parliament’s Economic and Monetary Affairs Committee (ECON). ECON has called for “clearer and tougher” rules on derivatives trading “so as to reduce speculative trading”.

One of several proposals in the 18-page consultation document on uncovered short selling, states that the overall approach would apply across the EU to all persons who engage in short selling, whether regulated or unregulated, and across all markets sectors.

Policy options can be grouped into three types: rules to increase transparency related to short sales, rules to reduce risks of uncovered selling, and emergency powers for competent authorities to impose temporary short selling restrictions (subject to co-ordination by ESMA).

The intention is that the new measures should harmonise rules across the EU relating to short selling, harmonise tools that member states may use in an emergency situation, and facilitate co-ordination between member states and by ESMA in an financial emergency - however, there is no definition of ‘emergency’.

The questionnaire can be accessed at