08 MAR 2011
MEPs have voted in favour of restricting the practice of "naked" short selling.
Short-sellers usually borrow shares or bonds, sell them, then buy them back when the stock falls - pocketing the difference.
"Naked" short-selling is when a trader sells financial instruments he has not yet borrowed.
A new directive places conditions on the use of credit defaults swaps (CDS) - a form of government debt insurance.
Under the new rules those traders who want to "short" a CDS would have to own the underlying government bond before they could sell it.
Some MEPs argue that the practice of naked short selling exacerbated the financial crisis, with the borrowing costs of countries like Greece being driven up by "speculation" on government debt.
They argue that traders have an incentive to drive down the price of a share or bond - and thereby needlessly damage a company or an economy.
"This regulation takes one more step towards curbing speculation and improving transparency in the financial services sector," MEPs said in a statement.
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