UK (Parliament Politic Magazine) – The United Kingdom is considering the elimination of European Union (EU) regulations that restrict the short-selling of sovereign bonds. The rationale behind this proposal is that by allowing investors, including hedge funds, to more easily speculate against government bonds, it will enhance liquidity in the £2.4tn gilt market.
On Tuesday, the Treasury announced its intention to terminate the ban on short selling of gilts, which was inherited from the EU. This ban currently prohibits investors from taking a short position unless they have borrowed the underlying bonds.
The UK government is seeking to eliminate certain limitations that were imposed by the European Union, specifically those that prohibit the short-selling of UK government bonds.
The UK Treasury has expressed its intention to lift the ban on short-selling gilts, which currently prevents investors from taking a short position unless they have borrowed the underlying bonds.
UK Government To Eliminate The Requirement Of Significant Shorts Positions
The Treasury has announced its plans to eliminate the requirement of disclosing significant short positions in gilts to the regulator, as well as lift the ban on purchasing credit default swaps (CDS) – contracts that act as insurance in the event of the UK government defaulting on its debt.
In an industry consultation launched on Tuesday, the Treasury stated that short selling of sovereign debt and owning sovereign CDS play a vital role in maintaining the smooth functioning of sovereign debt markets. These practices promote liquidity and aid in determining fair prices, according to the Treasury.
The current restrictions, the Treasury argues, are an unnecessary burden on the regulatory regime. It highlighted that the UK had expressed concerns about these restrictions when they were initially proposed in 2010, as they could potentially harm liquidity in gilts.
By removing these requirements and bans, the Treasury aims to foster a more efficient and effective sovereign debt market, ensuring its stability and resilience.
EU Implemented Short Selling Restrictions In 2012
The EU implemented short-selling restrictions in 2012, which were intended to address concerns that short-selling hedge funds were driving up borrowing costs for struggling economies like Greece, ultimately leading to bailouts. Interestingly, the UK, being the primary hub for CDS trading within the bloc, was the only member state that did not support these measures.
By removing these restrictions, the UK government aims to enhance the flexibility and efficiency of the financial markets, allowing investors to engage in a wider range of investment strategies. This move signifies a step towards greater autonomy and independence for the UK in shaping its financial regulations post-Brexit.
As part of a broader initiative known as the “Edinburgh reforms,” the UK is now seeking to relax these restrictions in order to enhance the competitiveness of its capital markets following Brexit. Chancellor Jeremy Hunt highlighted this objective in his recent Mansion House speech, where he outlined plans to eliminate nearly 100 unnecessary EU regulations that have been retained.
By loosening the short-selling curbs, the UK aims to create a more attractive environment for investors and businesses, fostering growth and innovation in its financial sector. This strategic move reflects the government’s commitment to shaping a dynamic and thriving post-Brexit economy.
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UK Launched A Comprehensive Review Of Short Selling Regulations
In December, the United Kingdom took a proactive step by launching a comprehensive review of short-selling regulations in stock markets. Dissatisfied with the European Union’s limitations on government debt, the Treasury referred to a 2013 report by the International Monetary Fund (IMF) that found no substantial evidence supporting the notion that purchasing credit default swaps (CDS) increased borrowing costs for sovereign entities.
Moreover, the Treasury underscored the significance of “covering” requirements in equity markets, where the total number of shares is relatively modest. However, it emphasized that these requirements hold less relevance in sovereign debt markets due to their larger scale and absence of comparable liquidity risks.
Jack Inglis, the Chief Executive of the hedge fund lobby group, the Alternative Investment Management Association, expressed his enthusiasm for the UK government’s consideration of a significant overhaul of the country’s short-selling regulations.
Inglis commended the government’s commitment to eliminating the detrimental practice of publicly disclosing individual firms’ short positions. Additionally, he praised the government’s intention to revise the regulations surrounding sovereign debt and credit default swaps (CDS). These proposed changes are expected to bring about a positive transformation in the financial landscape.