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UK challenge to ESMA's power to intervene in short selling markets dismissed by CJEU

Out-Law News | 23 Jan 2014 | 9:57 am | 2 min. read

The EU's highest court has dismissed a challenge brought by the UK to the power of the European Securities and Markets Authority (ESMA) to ban short selling in member states in emergencies.

The Court of Justice of the European Union (CJEU) said that the regulator's powers to do so did not go against its own powers or against EU law as they were "precisely delineated", temporary, had to be consulted on and could be challenged by way of judicial review.

"ESMA can adopt [the measures] only if ... such measures address 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 Union and there are cross-border implications," it said in its ruling. "Moreover, all ESMA measures are subject to the condition that either no competent national authority has taken measures to address the threat or one or more of those authorities have taken measures which have proven not to address the threat adequately."

"ESMA is [also] required to take into account ... the extent to which the measure significantly addresses the 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 Union or significantly improves the ability of the competent national authorities to monitor the threat in question, does not create a risk of regulatory arbitrage and does not have a detrimental effect on the efficiency of financial markets ... Moreover, the two kinds of measure which ESMA may take ... are strictly confined to those set out in [the ESMA Regulation]," it said.

The UK was ordered to pay the legal costs of the European Parliament and Council.

'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 in 2012. 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 Treasury said that it "disappointed" with the decision, which went against legal advice received by the CJEU in September. In the opinion of Advocate General Jääskinen, the power went "beyond the limits" of the EU's single market rules as it had the effect of being "not harmonisation but the replacement of national decision-making ... with EU level decision making".

"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," a spokesperson said. "We will now consider the judgment in detail and respond, in full, at a later date."

The UK is currently pursuing challenges against a number of other EU financial services rules, including a cap on bankers' bonuses and proposals to introduce a financial transaction tax.