The EU Economic and Financial Affairs and International Trade sub-committee of the House of Lords has made a request for evidence in connection with its review of the European Commission’s proposal for a regulation on short selling and certain aspects of credit default swaps (CDS). For our briefing on the draft regulation please click here.

Specifically, the sub-committee is seeking evidence regarding short selling in the sovereign bond market. Buying a CDS without having a long position in the underlying sovereign debt can be the economic equivalent of taking a short position in the underlying debt. The sub-committee has asked whether EU restrictions on CDS or naked CDS may have a negative impact on sovereign bond markets or increase the sovereign cost of borrowing. The draft regulation would ban naked short sales in equity securities and sovereign debt such that short sales would only be permitted where the seller has borrowed the instrument, entered into an agreement to borrow or made other arrangements to ensure that the instrument has been located and reserved for lending.

The sub-committee has raised several other questions relating to CDS, and is also seeking views on the pros and cons of enabling EU supervisors, rather than national authorities, to have the power to temporarily restrict or ban short selling (including CDS) in certain emergency situations. The sub-committee also welcomes views on any other aspect of the draft regulation.

The deadline for submissions is Friday, 3 December 2010. The Committee will publish submitted evidence on its website but is not planning to publish a report.

The draft regulation is expected to come before the Council of Ministers for agreement relatively soon, and may be brought forward for agreement as early as 7 December or alternatively at the start of 2011.