Short Selling (Amendment) (EU Exit) Regulations 2018

Lord Tunnicliffe Excerpts

Wednesday 28th November 2018 Lords Chamber

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I thank the noble Lord, Lord Bates, for his introduction and once again declare my interest in the register as a director of the London Stock Exchange plc.

It is fair to say that when this legislation was negotiated, a lot of it was directed against the markets in London, so if anyone is worried that the regime will run without so many requirements for consultation, it should not be the UK. I had the advantage of participating in scrutiny on Sub-Committee A of the Secondary Legislation Committee, on which I sit. As the Minister explained, in consequence, there has been an extension to the Explanatory Memorandum, and I thank him for that. The correspondence about that is in Appendix 2 to the report. As he said, it mainly concerns the use of sovereign credit default swaps for hedging purposes. That is the single issue to which I shall return.

By way of background, sovereign credit default swaps and their short selling was a highly contentious issue at the time of the eurozone sovereign debt crisis, with many wanting to ban sovereign CDSs altogether, blaming them for escalation to the crisis. It took several months of my life turning that around to establish that there was such a thing as legitimate hedging of correlated assets. Due to that sensitivity, it is worth more clearly explaining that in consequence of changes made in the regulation, there is a widening of the scope of the assets that sterling CDSs could be used to hedge—which, again, the Minister explained— which happens by removing the EEA reference and replacing it with a global one. I do not object to that widening—there was a choice between narrowing or widening, and widening probably goes with the open approach of the UK—but it means wider possible use of sterling credit default swaps. I want to ensure that that is properly understood, should anyone ever read this debate.

It would also be worth knowing what, if any, assessment of the additional volume that is expected to create, if any such calculation has been done, especially in the event of a no-deal Brexit, when some more chaotic things may be happening of the variety that was of concern during the eurozone sovereign debt crisis. I am still confused why Articles 8.4, 8.5 and 8.6 of the delegated act regulation have been deleted. Deleting those paragraphs removes the requirement for a Pearson correlation coefficient of 80% as part of the high correlation definition under Article 3.7(b) of the short selling regulation. The 70% threshold is retained under Article 3.7(c), within Article 18 of the delegated Act. Article 18 was cited in correspondence with the sub-committee as what the Treasury will follow when it takes over setting the correlation conditions.

I do not object to the Treasury taking over setting correlation conditions, because I think it has a good interest in what happens to hedging using sterling CDSs. I just want to know whether 80% is out of favour, whether something happened to replace it prior to the regulation, or whether that change is another widening.

[Lord Tunnicliffe (Lab)]

My Lords, I thank the Minister for presenting this statutory instrument. I thank him, first, for forcing me to understand a little about short selling; it took several hours to get a reasonable knowledge of it. What I found most difficult were the various exemptions. I sought help from the department to try to understand them. It was pointed out to me that, in some ways, that was the wrong question. The key essence of much of what we are doing tonight is in Section 8 of the European Union (Withdrawal) Act. I remember the debates on that provision with great care, and the overwhelming requirement of Section 8 is that it should not be used to change policy, except as required for the smooth transition.