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[CyclopsRock]

Britain has lost a legal challenge to European Union powers to ban short-selling in key test case that has major implication for the City of London's financial services.

The Government challenged the new powers, granted to the EU's Paris based regulator in 2012, to overrule national financial authorities in order to police financial markets as "unlawful" and an "institutional revolution".

In a binding ruling that will have implications for all new financial regulations form Brussels and that is significant setback for George Osborne, the Chancellor, the European Court of Justice has thrown out Britain's objection that the new powers go beyond the EU's treaties.

"The power of the European Securities and Markets Authority (Esma) to adopt emergency measures on the financial markets of the Member States in order to regulate or prohibit short selling is compatible with EU law," ECJ judges ruled on Wednesday.

"As all the pleas in law relied on by the United Kingdom have been rejected, the court dismisses the action in its entirety."

The ruling overturns legal advice given to the ECJ in September that rejected the new Esma powers to override national financial supervisors to regulate or prohibit short-selling.

A spokesman said the Government would "consider the judgment in detail and respond, in full, at a later date".

"We are disappointed that the ECJ has chosen not to uphold the UK's challenge on this case and, in doing so, has rejected the opinion of its own advocate general," said the spokesman.

"We've consistently said we want tough financial regulation that works but any powers conferred on EU agencies must be consistent with the EU treaties and ensure legal certainty."

Alexandria Carr, regulatory lawyer at Mayer Brown, said the ruling was "influenced as much by political as legal factors" amid growing concerns in European capitals beyond London that the EU was taking too many powers over financial services.

"The decision of the court has wider significance," she said.

"It is likely to cause concern in the UK and some other member states, including Germany, which are already uneasy with the way in which the EU's legal framework is being stretched as the EU seeks to confer wide new powers on EU bodies whilst avoiding the thorny question of whether this actually necessitates treaty change."

Esma was given the unprecedented powers to ban short-selling after Britain lost a political battle to stop the measure and the Chancellor was outvoted in a council of EU finance ministers.

Rejecting Britain's legal case that "extensive discretion given to Esma is contrary to the institutional balance laid down in the treaties", ECJ judges ruled that the EU regulator's power to ban short-selling did not go beyond its original brief.

"Circumscribed by various conditions and criteria which limit that authority's discretion, the exercise of that power does not undermine the rules governing the delegation of powers laid down by the EU treaty," said the ECJ.

There's a bit more legal wonkery at the link: http://www.telegraph.co.uk/finance/...-unlawful-EU-powers-to-ban-short-selling.html

-------------

Here's a link to an article about the original council given to the EU that their regulations were illegal - council that is agreed upon in 80% of cases: http://www.telegraph.co.uk/finance/...top-adviser-to-European-Court-of-Justice.html

There are several interesting facets here:

- The fact that a supranational body votes for a regulation whose negative impacts fall overwhelmingly on one or two members. This is, of course, par for the course when it comes to Supranational bodies (in fact, I suppose that's rather the point; See: the UN).

- That the regulation is invoked as an "emergency measure" has a number of historic parallels. One might argue that this door would have been better shut before the horse bolted.

- For those unawares, if the Conservatives get into government after the UK's 2015 election, they've pledged a national referendum on our membership of the EU in 2017 after the government has "renegotiated" our position within in (in other words, the referendum will be between staying in the new, renegotiated EU or leave entirely). Exactly what this renegotiation will entail is anyone's guess at the moment, but the suggestions of political motivation behind this ruling don't bode well for the success of any renegotiation. What might this mean for the referendum (and the public's perception of whether the UK is best off in or out of the EU)?

- The reason why the definition of the powers of the regulatory bodies may be "stretched" is that formally giving it more powers would require a new treaty. The last time they tried to pass a new treaty, it was rejected by referendums in a number of countries, and therefore couldn't be passed. The treaty was then re-worded an re-jigged in such a way that it no longer needed to pass national referendums, but also didn't offer quite the same powers. Needless to say, the EU is hesitant to try to pass a new treaty, as they suspect they might lose the requisite referendums again. A new treaty requires all member states sign up, not just a majority.

Thoughts?

 

[twobear]

I half agree about the closing the doors after the horse has bolted issue, in the sense that stronger regulation on the City would certainly have helped stop the 07/08 crash being as serious as it was, but in the longer term there will almost certainly be another finance sector-caused recession in the future unless stronger regulation is put in place, so from that point it's just taking sensible precautions.

[edit] Although, of course, more change is needed than just a ban on short selling.

 

[Alx]

So what is short-selling exactly ?

 

[CyclopsRock]

So what is short-selling exactly ?

In a nut shell, it's betting on something losing rather than winning. A share, commodity, currency, future etc goes down and someone makes money off it. It means you have situations where people are praying for the value of something to go down because they personally benefit, though oftentimes that'll harm the wider economy. The extent to which these sorts of trades cause harm, though, is up for debate.

 

[twobear]

So what is short-selling exactly ?

My (admittedly weak) understanding is that you borrow and then sell shares that you think are going to go down in value over (a short period of) time; then when the value has gone down you buy the same number of shares at the lower value and return those shares to the original lender, making a profit in the process.

 

[Nilaul]

In a nut shell, it's betting on something losing rather than winning. A share, commodity, currency, future etc goes down and someone makes money off it. It means you have situations where people are praying for the value of something to go down because they personally benefit, though oftentimes that'll harm the wider economy. The extent to which these sorts of trades cause harm, though, is up for debate.

Sounds wrong. I guess its a good thing to ban this. Don't want to encourage people to force a company to fail.

 

[hat_hair]

significant setback for George Osborne

I don't know much about economics, but anything that annoys George Osborne is ok by me.

 

[leadbelly]

"It is likely to cause concern in the UK and some other member states, including Germany, which are already uneasy with the way in which the EU's legal framework is being stretched as the EU seeks to confer wide new powers on EU bodies whilst avoiding the thorny question of whether this actually necessitates treaty change."

lol

If it was laws that affected the general population they wouldn't give a fuck. Laws that affect the banking sector, however, now they're bothered by the EU's increasing power.

 

[Nikodemos]

The British government is so paranoid about losing its (admittedly meagre, compred to the sums involved) income from banking activities that it's rabidly attacking any and all attempts at regulating banking at a Union-level. It's basically become the British banking sector's watchdog, in a harmonious melding of private and public interests

Spoiler

trololo

. Another one of the WWotW's legacies of monomanic "economic development".

 

[Nilaul]

lol

If it was laws that affected the general population they wouldn't give a fuck. Laws that affect the banking sector, however, now they're bothered by the EU's increasing power.

They are uneasy about anything that takes away power from corporations.

Which is basically everything that the EU does (very pro consumer and human rights)

 

[leadbelly]

They are uneasy about anything that takes away power from corporations.

Yep.

 

[CyclopsRock]

The British government is so paranoid about losing its (admittedly meagre, compred to the sums involved) income from banking activities that it's rabidly attacking any and all attempts at regulating banking at a Union-level. It's basically become the British banking sector's watchdog, in a harmonious melding of private and public interests

Spoiler

trololo

. Another one of the WWotW's legacies of monomanic "economic development".

I wouldn't say it's "meagre" - it contributes more to the exchequer than any other industry and employs many people (and pays them well), as well as ensuring lots of companies are head quartered here. This all has obvious knock on effects for the wider economy as more office space is needed etc etc. The benefits go beyond just tax revenue.

 

[twobear]

The other issue for me is that, I'm pretty sure if you canvassed the population (without telling them that it was what the EU wanted, so as to not skew the results), they'd probably support greater control and regulation on the financial sector. So I'm not really sure there's much of an argument to be made about democratic accountability, or what-have-you, if the EU is doing things that the population of a member state want but that the government of that state is unwilling to do.

 

[Jackpot]

Good. UK gov practically bends over to please the City no matter what the consequences.

 

[ElectricBlue187]

Sounds wrong. I guess its a good thing to ban this. Don't want to encourage people to force a company to fail.

Now the stock market will go up forever!

Seriouser answer: you're betting that the stock will fall at great personal risk, you aren't forcing anything.

 

[Nikodemos]

I wouldn't say it's "meagre" - it contributes more to the exchequer than any other industry and employs many people (and pays them well), as well as ensuring lots of companies are head quartered here. This all has obvious knock on effects for the wider economy as more office space is needed etc etc. The benefits go beyond just tax revenue.

It's meagre compared to the vast sums of simoleons being funnelled through it daily. The exchequer sees the metaphorical dog scraps from the masters' tables.

The other issue for me is that, I'm pretty sure if you canvassed the population (without telling them that it was what the EU wanted, so as to not skew the results), they'd probably support greater control and regulation on the financial sector. So I'm not really sure there's much of an argument to be made about democratic accountability, or what-have-you, if the EU is doing things that the population of a member state want but that the government of that state is unwilling to do.

It's all about bullshit populist Eurosceptic posturing.

 

[CyclopsRock]

The other issue for me is that, I'm pretty sure if you canvassed the population (without telling them that it was what the EU wanted, so as to not skew the results), they'd probably support greater control and regulation on the financial sector. So I'm not really sure there's much of an argument to be made about democratic accountability, or what-have-you, if the EU is doing things that the population of a member state want but that the government of that state is unwilling to do.

That's a sort of circumstantial boon though, right? I mean, that justification would apply equally to the British Empire intervening to stop female circumcision in various colonies in the 19th century, which might be an objective "good" but doesn't really justify the wielding of that power.

Quite aside from anything else, canvassing the population about things they don't really understand is rarely a good route to wisdom - which makes the impact this might have on an EU referendum (especially when it involves a mystically renegotiated EU) somewhat ironic, given that basically the same applies there.

 

[antronoid]

I don't know much about economics, but anything that annoys George Osborne is ok by me.

I was in the stadium that boo'd him during the Paralympics, was a satisfying experience.

 

[leadbelly]

Which is basically everything that the EU does (very pro consumer and human rights)

In that respect, that may be right, but in terms of democratic influence on the growing power of the EU, the general population of EU countries have been pretty much ignored. That is partly the problem of nation states not giving the people the vote on whether they actually want to be in the EU as it now stands though.

Public opinion is not really of interest with nation states, it seems. Why I found it amusing how they suddenly become really concerned about it once it is applied to the banking sector.

 

[CyclopsRock]

It's meagre compared to the vast sums of simoleons being funnelled through it daily. The exchequer sees the metaphorical dog scraps from the masters' tables.

So? The government doesn't get automatic shotgun rights on money just because there's a lot of it. I'm certainly not saying they don't make a lot of money, but the majority of the money "funneled" through the city is going backwards and forwards. It's not profit (though it may - and probably will- lead to profit), which is why things like transaction taxes are a bit ... odd. They suggest that the act of using money in the finance sector is sufficient justification for some of it to go to the government, irrespective of whether it leads to profit (either as an individual transaction, or for the company as a whole).

 

[scytheavatar]

Sounds wrong. I guess its a good thing to ban this. Don't want to encourage people to force a company to fail.

http://en.wikipedia.org/wiki/Short_(finance)#Views_of_short_selling

The flipside of the argument is that short selling is one of the best ways to warn others that a share is overpriced and potential fraud is happening. But it's a complicated issues, since short sellers have been accursed of frequently doing whatever it takes to get a share price to fall (not that it's any worse than those using dubious means to get people making questionable investments).

 

[Arksy]

When's the UK quitting the EU? Has a referendum date been set? I suppose this is just one more reason to add to the numerous for a Brexit.

 

[Nilaul]

In that respect, that may be right, but in terms of democratic influence on the growing power of the EU, the general population of EU countries have been pretty much ignored. That is partly the problem of nation states not giving the people the vote on whether they actually want to be in the EU as it now stands though.

Public opinion is not really of interest with nation states, it seems. Why I found it amusing how they suddenly become really concerned about it once it is applied to the banking sector.

Yep austerity measures and the way they force themselves into countries ain't exactly very democratic and fair. But they are very pro consumer in other means.

About the forcing themselves into countries and having no poll is not really EU's fault though; its the locals government's job to conduct the polls.

 

[Nilaul]

When's the UK quitting the EU? Has a referendum date been set? I suppose this is just one more reason to add to the numerous for a Brexit.

I wonder what would happen to the universities if England wanted out?

 

[leadbelly]

Yep austerity measures and the way they force themselves into countries ain't exactly very democratic and fair. But they are very pro consumer in other means.

Even taking money out of people's accounts in Cyprus... No one gave a fuck about that.

About the forcing themselves into countries and having no poll is not really EU's fault though; its the locals government's job to conduct the polls.

I said that also. It is partly the fault of EU countries not wanting to give the people a chance to decide.

That is partly the problem of nation states not giving the people the vote on whether they actually want to be in the EU as it now stands though.

 

[Sir_Crocodile]

Can't we just ignore the law like other eu countries do with laws they don't like?

 

[Nilaul]

Even taking money out of people's accounts in Cyprus... No one gave a fuck about that.



I said that also. It is partly the fault of EU countries not wanting to give the people a chance to decide.

They didn't take money out of normal people, they aimed at large bank deposits; which where mainly Russians. The austerity measures are just.. uhh though.

 

[leadbelly]

They didn't take money out of normal people, they aimed at large bank deposits; which where mainly Russians.

Yeah. But there were people that had their life savings in those accounts...

I'm not sure it matters that much. They took people's money from their account without their permission.

 

[Arksy]

The idea that it was just Russian oligarchs is bullshit. There were stories about how an English restauranteur got fucked over because he had just sold his restaurant in order to buy another one and just happened to have a lot of money in the bank for the purposes of the transaction.

 

[Nilaul]

Yeah. But there were people that had their life savings in those accounts...

I'm not sure it matters that much. They took people's money from their account without their permission.

If you had above 100,000-150,000 or something like that.

 

[Nilaul]

The idea that it was just Russian oligarchs is bullshit. There were stories about how an English restauranteur got fucked over because he had just sold his restaurant in order to buy another one and just happened to have a lot of money in the bank for the purposes of the transaction.

It wasn't a well planned out plan set up. They didn't think it over they well at all. Very rushed decision. It was preliminary aimed at Russians, but since the "minimum sum" wasn't too high it effected more.

 

[leadbelly]

If you had above 100,000-150,000 or something like that.

Yeah. It was a lot of money, but ethically, it's kind of disgusting what they did. The financial collapse was not their fault. You've got these too-big-to-fail banks that get pretty much free money and an incentive to carry on rigging the system because they know they will just get bailed out again. Yet, how they decided to solve the problem was to just fuck over the people. And we're just kicking the can further down the road.

I suppose these new regulations may help to rectify the problem.

 

[twobear]

That's a sort of circumstantial boon though, right? I mean, that justification would apply equally to the British Empire intervening to stop female circumcision in various colonies in the 19th century, which might be an objective "good" but doesn't really justify the wielding of that power.

Quite aside from anything else, canvassing the population about things they don't really understand is rarely a good route to wisdom - which makes the impact this might have on an EU referendum (especially when it involves a mystically renegotiated EU) somewhat ironic, given that basically the same applies there.

Well, except that the EU is an organisation that we're voluntarily a part of and that we can leave at any time, whereas the British Empire was not, which makes the analogy strained at best. Of course, the merits of the legislation have to be taken into account too. If anything I worry that merely banning short-selling doesn't go far enough, and that stricter EU-wide financial regulations need to be put in place, but that wont happen any time soon.

 

[Ace Harding]

Holy crap. They are banning short selling? And it's being forced on a country that doesn't want to do it? Talk about judicial and regulatory overreach. Short selling can help moderate overheated markets. People generally cannot cause a well-run, financially healthy, well-capitalized company to fail by selling its stock short. Other, smarter people (who are also interested in making money) would buy the stock long if the price was below market. If there was somehow a conspiracy to use short sales as a way to kill a company, the conspiracy is what should be (and is) illegal. Not the short sale itself.

Are put options illegal too? Because they effectively do the same thing ("betting" on a stock price to go down).

 

[twobear]

Holy crap. They are banning short selling? And it's being forced on a country that doesn't want to do it? Talk about judicial and regulatory overreach. Short selling can help moderate overheated markets. People generally cannot cause a well-run, financially healthy, well-capitalized company to fail by selling its stock short. Other, smarter people (who are also interested in making money) would buy the stock long if the price was below market. If there was somehow a conspiracy to use short sales as a way to kill a company, the conspiracy is what should be (and is) illegal. Not the short sale itself.

Are put options illegal too? Because they effectively do the same thing ("betting" on a stock price to go down).

As I recall, they banned it because they accused short-selling of undermining attempts to stabilise Greece. But you do highlight another issue here, which is that if regulations are going to be put in place, they really need to be the right regulations.

 

[jorma]

I'm ok with this.

 

[Deleted member 231381]

So what is short-selling exactly ?

To short sell is to borrow a particular stock or share from someone, sell it while the value is high, wait for the value to fall, and then buy that stock or share back for less than you sold it for. Ideally, the short seller will have made enough to both cover the cost of borrowing and run a profit. It's problematic because it creates an incentive for the short seller to make a particular company or franchise to fall in value, and significantly well-known sellers can meet this incentive by spreading fear or uncertainty about that company. This is very difficult to target via legislation - you can't really penalize someone for saying "I think X company is going to do badly", because it can be very difficult to prove intent. After all, if you're short-selling, you must actually have reckoned they were going to do badly anyway, so anyone trying to prosecute would have to prove your comment was causal and not predictive. This is rather difficult to do, and hence why legislation trying to curb rather than prohibit short-selling doesn't really exist.

It can have some positive effects, though - if a market is overheating, short selling means that suddenly a lot more stocks and shares are available for purchase, which means supply increases and cools down the pricing. The European Union is almost certainly banning it because it's been used to aggressively target Eurozone members such as Greece. Given the United Kingdom and thus the City isn't part of the Eurozone, they therefore feel somewhat unjustifiably restricted. However, I suspect if you were to put this to the democratic mandate within the United Kingdom directly, it would pass anyway, so really this is a case of the European Union upholding the desires of European citizens against their governments.

EDIT: An interesting response to aggressive short-selling was one used by Hong Kong in the late '90s, when in response to a mass borrow and sell of shares, the Hong Kong government responded by buying all of the sold shares and threatening to sit on them until the sellers had to default on those they'd borrowed from, unless the short-sellers paid a price the Hong Kong government thought was adequate. The short-sellers knew that they'd lose more from the default than they would for buying back the shares at an accurate market price, and so capitulated.

 

[Alx]

Thanks CyclopsRock, godelsmetric and Crab for your explanations.
I think I'm fine with the regulation then. Morally speaking I can't say that I like the idea of short selling, and politically speaking I don't think the Union is getting out of its way in trying to regulate it (the only thing on which all members of the EU will agree is that its first purpose is to define a common economical environment for all of them).
Although I can see how it would be difficult to enforce anyway...

 

[Walshicus]

If it hurts Osborne it's pretty much guaranteed to benefit us.

 

[Deleted member 13876]

Short selling played a key part in the housing bubble when companies created toxic assets out of bundles of loans they knew people wouldn't be able to pay back and rake it in bigtime by betting against them.

 

[Seth C]

Now the stock market will go up forever!

Seriouser answer: you're betting that the stock will fall at great personal risk, you aren't forcing anything.

Seriouser-we response: what was the a rural purpose of the creation of stocks?

 

[fizzelopeguss]

If it hurts Osborne it's pretty much guaranteed to benefit us.

Pretty much, Westminster and the city are leeches working in tandem.

 

[Reuenthal]

They didn't take money out of normal people, they aimed at large bank deposits; which where mainly Russians. The austerity measures are just.. uhh though.

That is completly untrue. Employers lost their money, they even cut the money of charity funds. Pension funds, that is the money of normal people who got pensions were target of a cut . 100000 is also not that much money and a lot of normal people lost their money and live savings that they worked hard for over many years. Then there are the ripples send through the economy due to this disastrous decision.