Saturday, June 01, 2013

E.U. Court of Justice to Hear UK Challenge to E.U. Short Selling Directive

It is being reported that the E.U. Court of Justice is scheduled to hear the U.K. challenge to the Short Selling Regulation next month. The U.K. government has launched a judicial challenge to the E.U. Short Selling Regulation on the grounds that the Regulation bestows too much discretionary power on the European Securities and Markets Authority ESMA). In its complaint filed with the Court of Justice of the E.U., the U.K. noted that Article 28 of the Regulation gives ESMA intervention powers in exceptional circumstances, requiring ESMA to prohibit or impose conditions on the entry by persons into short sales or to require such persons to disclose such positions if the transactions pose a threat to the orderly functioning and integrity of the financial markets, or to financial stability with cross-border implications. The measures are valid for up to three months, but ESMA is empowered to renew them indefinitely. The measures prevail over any previous measures taken by a competent authority pursuant to the Short Selling Regulation. United Kingdom v. Council of the European Union, Case No. C-270/12.

The United Kingdom argues that Article 28 is unlawful because the criteria as to when ESMA is required to take action under the Article entail a large measure of discretion. giving ESMA a wide range of choices as to what measure or measures to impose and what exceptions to specify, and these choices have very significant economic policy implications.

The factors which ESMA must take into account contain tests which are highly subjective, said the U.K., and ESMA is empowered to renew its measures without any limit on their overall duration. Even if Article 28 did not involve ESMA in making macroeconomic policy choices, which it does, said the complaint, ESMA nonetheless has a broad discretion as regards the application of policy to any particular case.

Article 28 purports to empower ESMA to impose measures of general application which have the force of law, contrary to the previous decisions of the Court. Also, Article 28 purports to confer on ESMA a power to adopt non-legislative acts of general application, contended the U.K., whereas under organic E.U. law the Council of the European Union has no authority to delegate such a power to a mere agency. To the extent that Article 28 would be interpreted as empowering ESMA to take individual measures directed at natural or legal persons, it would be ultra vires.

Very importantly, the U.K. believes that Article 28 can be judicially severed from the remainder of the Short Selling Regulation, thereby leaving the remainder of the Regulation intact.

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