A pan-European short selling disclosure system should be introduced into EU financial markets, according to the Committee of European Securities Regulators (CESR).

In a new report, CESR said it “recognises that legitimate short selling plays an important role in financial markets”, such as efficient price discovery, improved liquidity and “possibly” the mitigation of market bubbles. However, the organisation felt that “abusive” short selling can have an adverse effect on markets and can potentially increase market turmoil.

Anastassios Gabrielides, chairman of the capital market commission of Greece and chair of CESR-Pol, commented: “The advice provided by CESR today seeks to pave the way for the introduction of a consistent regime across Europe to short selling, which both recognises its value and mitigates its risks. The proposed regime is therefore tailored to cover as wide a range of markets, instruments and market participants as practically possible in order to ensure the integrity of European equity markets.”

The report proposed a two-tier system, where positions at the lower threshold of 0.2% would be required to be disclosed to the authorities, with steps of 0.1% “[triggering] further disclosure obligations”. Positions higher than the 0.5% threshold and any further steps of 0.1% would be required to be disclosed to both the regulator and the market as a whole.

Gabrielides said that the regime would help to deal with abusive behaviour at “an early stage”, increasing the power of regulators to target the problem. Additionally, disclosing short selling positions publically would “provide information benefits to the market”.

While a pan-European system is likely to take time to implement, the CESR said its members which currently have sufficient powers to introduce a permanent disclosure regime will begin to do so, while those members will aim for a “best efforts” approach.