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ESMA short selling oversight powers should be annulled, says Advocate General

The European Securities and Markets Authority (ESMA), one of the EU's financial services regulators, should be stripped of its power to ban short selling in member states in emergencies, an EU legal adviser has ruled.

Giving a non-binding opinion to the Court of Justice of the European Union (CJEU), Advocate General Jääskinen said that the power went "beyond the limits" of the EU's single market rules. Its outcome was "not harmonisation but the replacement of national decision-making ... with EU level decision-making", he said.

"The Advocate General's findings provide a clear indication that, in his view, ESMA must ensure that it does not overstep the mark when exercising its powers in seemingly urgent situations," said financial services regulation expert Monica Gogna of Pinsent Masons, the law firm behind Out-Law.com.

"The findings re-affirm the view that member state sovereignty and the principle of unanimity among member states is of key importance, and that these principles should not be overridden even when there is panic in the marketplace," she said.

The case will be heard by the CJEU shortly. Opinions of Advocates General are not binding on the court, but are followed in the majority of cases.

'Short selling' occurs when investors sell assets, such as shares, hoping that the price will fall so that they can buy the assets back at a cheaper price in order to pocket the difference. Short selling can be 'covered', meaning that the seller has borrowed the assets to sell; or 'naked', when the seller has not.

A new EU Regulation on short selling, which included a general ban on the naked short selling of shares, came into force last year. As part of the new regime, ESMA was given certain powers to intervene in member state financial markets in the event of a "threat to the orderly functioning and integrity of financial markets or to the stability of the whole or part of the financial system" in the EU. These actions can include imposing notification and disclosure requirements on individuals and companies, and preventing certain transactions from taking place.

The UK Government is challenging this provision on a number of grounds, including that the powers given to ESMA by the new regulation breached the limits of regulatory power set by the CJEU in previous cases. Although the Advocate General rejected these arguments, he agreed with the UK that the EU's power to make laws "which have as their object the establishment and functioning of the internal market" was an "incorrect legal basis" under which to give ESMA this power.

Jääskinen said that it was appropriate for ESMA to have been given general regulatory oversight of short selling in relation to the single market rules, as it was "necessary to harmonise the rules ... because of the likelihood that, otherwise, member states will continue to take diverging measures". However, the regulator's special powers to intervene in the market went "much further than a power to 'lay down measures relating to a specific product or class of products and, if necessary, individual measures concerning those products'" as specified in the legislation, he said.

Also of relevance was the fact that ESMA could decide to take action "on the basis of a qualified majority of its Board of Supervisors", Jääskinen said.

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