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UK loses EU case on short selling ban

22 January 2014


European Court of Justice rules that Esma’s emergency powers to ban short selling are legal and refutes the legal opinion of its advocate general

Read more: EU short selling UK

The European Court of Justice (ECJ) has ruled that emergency powers of the European regulator to ban short selling in member states are compatible with EU law.

The ECJ issued the statement following its judgment on a high-profile case brought forward by the UK against the European Parliament and European Council.

The case has attracted a great deal of attention in recent months and its outcome was widely expected to indicate the development of future controversial proposed EU laws such as the financial transactions tax (FTT).

The ECJ ditched the legal opinion of its advocate general Niilo Jääskinen who last year branded the short selling ban powers as illegal and called for them to be annulled immediately. The move may come as a surprise to some, given that opinions of advocate generals - while not legally binding - are the suggested decisions for the ECJ and are followed in most cases.

Under Article 28 of the EU regulation establishing the European Securities and Markets Authority (Esma) as the Europe-wide financial regulator, powers to ban short selling across all member states were granted. These powers were derived from Article 114 TFUE, "which allows for the adoption of harmonising measures where necessary for the achievement and functioning of the internal market".

The UK challenged this on the grounds that Article 114 TFUE was not the correct legal basis for the Esma's powers, while also arguing that Esma's ability to ban short selling went beyond EU constitutional law principles on the delegation of powers by the institutions.

Jääskinen's legal opinion agreed that Article 114 TFUE was not the correct legal basis for Esma's powers under Article 28 because the short selling powers were intended as an emergency measure rather than a market harmonisation measure.

He instead suggested that Article 352 TFUE be used as the basis for Esma's short selling powers. He said if the ECJ should decide to stick with Article 114 TFUE, it should disregard the UK's argument over the constitutionality of the powers, since Article 28 includes specific safeguards over the type, scope and duration of Esma emergency measures.

However the ECJ decided that Article 114 TFEU is the "appropriate legal basis" and that Article 28 "does not confer any autonomous power on Esma that goes beyond the powers granted to it". The court also pointed out that there are various conditions and criteria that limit Esma's ability to exercise these powers, for example there must be a threat to financial markets or stability of the EU financial system.

The UK has also publicly opposed the proposed FTT, with a UK House of Lords committee recently calling it "alive and deadly". The UK chancellor George Osborne has launched lawsuits over both the FTT and the EU cap on bankers' bonuses.

The UK has opposed the tax as it will be obliged to collect the levy if UK firms trade with firms domiciled in the FTT zone, which it argued was illegal. That position appears to have been strengthened by a leaked legal opinion last September, which revealed that EU lawyers believed the FTT was illegal.


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