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EUROPEAN PARLIAMENT ISSUES
REGULATIONS TO CURB SPECULATION IN
SOVEREIGN DEBT CRISIS IN EUROPE

By Rolando Arturo Leiva
11 novemberr 2011

Heidelberg, (Germany) - The European Parliament, with headquarters in
Strasbourg, France, in a comprehensive document dated April 23, 2011 and
approved on first reading, has sent to the General Assembly a Draft Resolution,
which, through various recitals and articles, seems to make clear its view that
financial and stock market speculation is one if not, the central causes of the current
sovereign debt crisis in Europe, sometimes referred to as an "anomalous descent '"
of the values and an apparently induced decline or abortion of the markets, which
may threaten, in the opinion of the legislative institution, the overall financial stability
of the countries belonging to the European Union.

The Draft Resolution has be presented by the Legislative Committee on Economic
and Monetary Affairs in the form of a proposal to specifically legislate on the topic of
short sales, -or those performed on the same day in the stock and financial marketand
on certain aspects of so-called Credit Default Swaps (CDS).

The proposed regulation, has benn adopted at first reading, and consecuently then
the President has been asked to transmit this European Parliament's position to
both the European Commission and to the Council of the European Union.
In its preamble, the proposal however begins to assert the validity of the above
financial instruments, pointing out that the current proposed regulation does not
seek to unfairly eliminate advantages that might result in short sales for the validity
and efficiency of markets in order to increase liquidity market, noting that these short
sales may allow investors to "act when they believe that a particular value is
overrated", in which case, short sales contribute then, to more efficiently fix the prices
of those securities.

The proposed regulation similarly exempts from its provisions commodity markets
and especially agricultural markets.

However, in another regard, recognizes the draft resolution that short sales can also
cause systemic risk or are abusive, pointing out further on that the European
regulatory financial authority called European Securities and Markets (ESMA) must
be entitled to "monitor and if necessary investigate short sales" if they are
performed over a certain threshold.

Such positions, the Draft Resolution recognizes in another of his recitals, generate
actually systemic risk or could be used for abusive purposes recommending that
regulatory authorities need to dispose all the necessary information about any of
these most significant short positions, as these instruments can be used to cause
harm in sovereign debt markets whose liquidity has already been weakened.
The naked short selling, or carried out without financial support, and when it is
carried out on a State's sovereign debt, "may increase the potential risk of failure on
liquidity, volatility and market abuse," the Resolution says in another regard,
proposing then, that if at the end of the trading day, a buyer could not cover the
amount he gained, should receive "a penalty high enough to enable the seller not to
make any profit."

Recognizes later also, in recital No. 20, that short sales and operations with CDS
(Credit Default Swaps) have been used to produce "anomalous drop" of a financial
instrument.

These operations, -states the document-, cause "a serious threat to financial stability
and market confidence," recommending the adoption of a wide range of measures to
defend markets of caused instability.

This type of trasacciones can cause a significant but artificial decline in the price of
a financial instrument it is recognized later, considering that the competent authority
is obliged to temporarily restrict short sales "in order to intervene quickly to prevent
abnormal drop in the price of that instrument. "

In Recital No. 25, estimates in turn that short sales and other related activities, come
to "threaten the proper functioning and integrity of financial markets or the stability of
all or part of the European Union" , stating that the regulator authority should also
take "sufficient steps to address this threat."

The monitoring, surveillance, punishment should be applicable, -says the document,
continuing later-, either to individuals, legal entities or actions and transactions
carried out outside the European Union limits, suggesting the elaboration of
agreements and exchanges of information in this effect, between the authorities of
third countries.

The draft resolution also points out that information asymmetries, have caused many
sectors have come to realize how short sales affects and induced unnatural prices,
suggesting then a system of exchange or communication information between the
competent authorities in order to avoid such effects.

Also the draft resolution, in its Considering No. 34, emphasizes that when a natural
or legal person holds a position uncovered or make a purchase in an unfunded Credit
Default Zwaps, this is often used as means to cause "a serious threat to
economically-financial stability and market confidence in a Member State of the
European Union."

In Article 4, paragraph 1, states, in turn, that the value of any asset or portfolio of
assets of a natural person or legal entity that holds a position found in a Credit
Default Zwaps, can be used in such a way as to bring then, "a positive correlation
with the decline in the credibility of a member State of the European Union."
Either adverse economic events or circumstances may be, then, produced by the
use of these financial instruments -complains in Chapter 1, Section 1- which
constitutes "a serious threat to financial stability and market confidence in the State
member or one or more other Member States of the European Union. "

Short operations or operations that create or refer to a financial instrument are
sometimes denounced in turn as producing and "confer a financial benefit to a
natural or legal person while driving down the price or value of another financial
instrument" and should therefore such commercial transactions on the edge of the
criminal act be banned or impose conditions on them, indicating also that this same
type of operations are frecuently used to perform operations on CDS Credit Default
Swaps in connection with the obligations of a Member State of the European Union
and to reduce its credibility.

The European Parliament, in this draft resolution, in denouncing this type of
speculative practices have been actually placed them to some exten, t as economic
crime, creating a broader perspective to understand the current problem of sovereign
debt in the countries of the European Union, and allowing in turn to understand that
this issue is not only rooted in the problems of unequal fiscal debt between Member
States that have signed the Stability Pact of the European Union, but in a kind of
stock market and financial speculation that appears to be limited only to exploit
weaknesses rather than failures in itself of the system from those 17 countries
sharing a common currency of the so-called Euro Zone.-

Rolando Arturo Leiva
Heidelberg, Germany
11 novemberr 2011

(Una versión de este artículo fue publicada en la News Letter - “InterEuropa Reporte”
- “La Crisis del Euro” noviembre 2011)