A European court has dismissed a challenge that was brought by the UK, questioning whether the region’s securities regulators should have the power to impose emergency curbs on short selling.
The European Court of Justice (ECJ) issued a decision today, dismissing the UK’s argument that the European Securities and Markets Authority (ESMA) shouldn’t be able to adopt emergency measures to prohibit short selling; which, it argued, violates general EU principles. It sought to annul that element of the rules.
However, the court denied the UK’s argument, ruling that the ESMA’s power to impose emergency curbs on short selling, in the name of ensuring financial stability, is compatible with EU law. It found that the regulation does not go beyond the powers granted to the ESMA when it was created; and, it notes that the exercise of these powers is limited by various conditions.
At the height of the financial crisis, regulators in various jurisdictions (including Canada) temporarily limited short selling in certain stocks in an effort to calm volatile markets. Short selling curbs were also adopted during Europe’s sovereign debt crisis.
In today’s decision, the court pointed out that the ESMA can only adopt these sorts of measures in order to address a threat to the financial markets, or the stability of the EU’s financial system, and where there are cross-border implications. And, it can only be used where national regulators have been unable, or unwilling, to address the threat themselves.
It also said that the ESMA must ensure that these measures do not create a risk of regulatory arbitrage, and don’t harm market efficiency. It’s also obliged to consult with other authorities, and to review emergency curbs regularly to assess whether they are still needed.
Ultimately, the court dismissed the action in its entirety. The ESMA and the European Commission welcomed the ruling.