http://www.nytimes.com/2010/09/16/business/global/16euro.html?src=busln

Europe Proposes Rules to Help Steady Markets

BRUSSELS — The European Commission on Wednesday proposed clamping down on certain kinds of trading on financial markets that governments have blamed for destabilizing the economy and endangering the euro.

Michel Barnier, the commissioner for the European Union’s internal market, said clear rules were needed in the area of short selling — essentially a bet by an investor that the price of something will fall — to defend vulnerable economies and to reassure markets that Europe was operating under a single rulebook.

Regulators would “gain clear powers to restrict or ban short selling in exceptional situations,” said Mr. Barnier. The measures were “a further step towards greater financial stability in Europe.”

Germany and France have blamed so-called naked short selling — where traders bet against securities they do not actually hold — for exacerbating the economic crisis in countries like Greece, Spain and Portugal.

Mr. Barnier also proposed separate rules designed to give regulators and investors more information about markets for derivatives, financial contracts linked to the future value or status of the underlying asset.

He said those rules were in line with actions already taken in the United States and designed to stop the collapses of banks like Lehman Brothers from destabilizing entire economies.

“No financial market can afford to remain a Wild West territory,” he said.

The proposals still need the backing of E.U. governments and the European Parliament to become law, which Mr. Barnier said could happen by the end of 2012. They would be the latest step by the Union aimed at tackling the underlying causes of the financial and banking crisis.

Last week governments agreed to create Europe-wide agencies overseeing insurance, banking and market trading, as well as a European Systemic Risk Board to watch for asset bubbles and other dangers to the financial system.

The new proposals on speculative trading follow the unilateral decision by Germany in May to halt naked short selling. That angered financial regulators in other countries and at E.U. headquarters in Brussels.

But Germany stepped up the pressure on Mr. Barnier, saying in June that he had been moving too slowly to regulate risky financial practices that made it unnecessarily expensive for governments to pay their debts.

On Wednesday Mr. Barnier still insisted that short selling had economic benefits and contributed to the efficiency of markets.

But he also acknowledged the risks.

“In normal times, short selling enhances market liquidity and contributes to efficient pricing,” said Mr. Barnier. “But in distressed markets, short selling can amplify price falls, leading to disorderly markets and systemic risks.”

Under the proposals, national regulators would, in exceptional circumstances, and with agreement from the new European Securities and Markets Authority, be allowed to temporarily restrict or ban short selling in any financial instrument. Exceptional circumstances could be if the price of a financial instrument fell by a significant amount in one day.

To curtail naked short selling, Mr. Barnier proposed rules that would require an investor to have borrowed the instruments concerned, entered into an agreement to borrow them, or have an arrangement with a third party to locate and reserve them for lending and delivery within a maximum of four days after the transaction.

In the United States, naked short sellers, before they execute the short, have to ensure that they can actually cover the short sale within three days.

Mr. Barnier said trades involving short sales should be “flagged” so regulators and investors could detect them more easily.

He also said that regulators should be able to access similar information about short positions on bond markets including on credit default swaps, which are used by investors to insure against the risk of government default.