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UK Government challenge to EU law on short selling rejected

The UK Government's legal challenge against a proposed new EU law on short-selling has been rejected by the European Court of Justice, reports the BBC.

The UK Government was attempting to limit the extent of the European Union law passed in 2012, which bans certain financial practices including short-selling.

However, the EU's highest court, the European Court of Justice, this week ruled that the EU's new financial rules were within its powers and dismissed the UK's case against them in their entirety.

As a result of the ruling, the UK will be unable to opt out of the legislation.

Short selling

Short selling is a financial practice whereby a security or other financial instrument is sold 'short', in other words, cheaply. The seller then agrees to repurchase the security or financial instrument at a lower price, effectively banking on the price of the security going down and profiting as a result.

The practice was widely criticised after the 2008 financial crisis when many short sellers targeted firms such as Lehman Brothers and Halifax Bank of Scotland (HBOS). The short selling of their stocks created widespread instability, leading to the eventual failure of Lehman Brothers.

Governments in Europe including the UK, Germany and France moved to introduce temporary bans on short selling to prevent spectacular crashes in value when shares are on a downward trend.

However, investors have argued that banning short selling makes financial markets inefficient, and that the practice in itself is not the cause of failure, it is the poor value of the businesses themselves.

European Securities and Markets Authority

In 2012 the EU introduced new laws allowing the European Securities and Markets Authority to introduce temporary bans on short selling if it thinks that the practice is threatening the stability of EU financial markets.

The aim of the laws is to ensure coordination of effort when dealing with instability in financial markets, and to give the authority the power in exceptional circumstances to reduce the risks to stability created by financial short selling.

The UK had argued that the laws were disproportionate, and were seeking the opportunity to opt out of the provisions relating to short selling, believing they will have a detrimental effect on the City of London.

The ECJ ruled that the new rules were fully compatible with EU law.

Speaking after the verdict a spokesman for the UK Treasury said it was disappointed with the outcome of the case.

"We've consistently said we want tough financial regulation that works, but any powers conferred on EU agencies must be consistent with the EU treaties and ensure legal certainty," they told the BBC.