The European Court of Justice on Wednesday rejected a British suit that the EU securities authority does not have the right to ban short-selling, a practice widely blamed for stoking financial market volatility.
The ruling followed a May 2012 action brought by Britain claiming the European Securities and Markets Authority (ESMA) had been given excessive powers to regulate or ban short selling in case of stress on the markets.
But in a ruling the Luxembourg-based court stated that "the power of ESMA to adopt emergency measures ... in order to regulate or prohibit short selling is compatible with EU law."
Short-selling consists of selling shares or other securities not owned by the vendor who is betting they will fall in price later and be cheaper to buy back, generating a profit.
If the market moves against the bet, the price rises, and the vendor is conversely forced to buy the shares before they go up too much, causing wild turns in the market.
The 2008 global financial crisis saw huge volatility in the markets which many blamed on short-selling, leading EU countries to limit or ban the practice in an effort to restore order.
Britain, home to one of the world's largest financial markets in London, has traditionally opposed such bans as ultimately doing more damage than good since they undercut liquidity.
London argued that a regulation adopted in 2012 to regulate short-selling gave ESMA powers to intervene on the markets that were at odds with EU treaties.
But the court ruling said "article 28 of the regulation does not confer any autonomous power on ESMA that goes beyond the powers granted to that authority when it was created."
"The powers available to ESMA are precisely delineated and amenable to judicial review in the light of the objectives established by the authority which delegated those powers to it," the court said in a statement.
"Those powers are compatible" with EU treaties, it added.
The European Court of Justice on Wednesday rejected a British suit that the EU securities authority does not have the right to ban short-selling, a practice widely blamed for stoking financial market volatility.
The ruling followed a May 2012 action brought by Britain claiming the European Securities and Markets Authority (ESMA) had been given excessive powers to regulate or ban short selling in case of stress on the markets.
But in a ruling the Luxembourg-based court stated that “the power of ESMA to adopt emergency measures … in order to regulate or prohibit short selling is compatible with EU law.”
Short-selling consists of selling shares or other securities not owned by the vendor who is betting they will fall in price later and be cheaper to buy back, generating a profit.
If the market moves against the bet, the price rises, and the vendor is conversely forced to buy the shares before they go up too much, causing wild turns in the market.
The 2008 global financial crisis saw huge volatility in the markets which many blamed on short-selling, leading EU countries to limit or ban the practice in an effort to restore order.
Britain, home to one of the world’s largest financial markets in London, has traditionally opposed such bans as ultimately doing more damage than good since they undercut liquidity.
London argued that a regulation adopted in 2012 to regulate short-selling gave ESMA powers to intervene on the markets that were at odds with EU treaties.
But the court ruling said “article 28 of the regulation does not confer any autonomous power on ESMA that goes beyond the powers granted to that authority when it was created.”
“The powers available to ESMA are precisely delineated and amenable to judicial review in the light of the objectives established by the authority which delegated those powers to it,” the court said in a statement.
“Those powers are compatible” with EU treaties, it added.
