The European Union rules to pacify the abusive short-selling of shares and government bonds led financial markets becoming more transparent, however changes were still needed for the current seven-month old law.

Short-selling is a risk on bond and stock prices falling. The seller need to loan the securities beforehand, sells them on loan in a bearish market. Supporters argue that it provides the market with further trading volume.

Analysts’ predict that short selling will bolster sharper swings in the markets which can further aggravate losses for ordinary investors in a bearish market. Supporters dispute that it provides the market with more trading volume.

Based on the new rules, which encompasses government bonds and bank shares, short positions above certain limits must be alerted to the market supervisors. The measures, the EU’s first set of bloc-wide rules to limit short-selling, were rushed through at the hype of the Eurozone crisis in an attempt to quiet the markets.

Politicians have blamed hedge funds at the time of worsening the debt crisis by letting on falls in the Greek and several others with government debt prices. The European Securities & markets Authority mentioned that the rules have had some encouraging effects.

Although, the ESMA is advising the European Commission to consider making adjustments to a number of aspects of the regulation that won’t change its main elements. Moreover, ESMA said that the rules have led to a slight decrease in price volatility but have made no major effect on trading volume. It urged changes in the way on how net short positions in shares and sovereign liabilities are calculated. Furthermore, ESMA also advised making clarifications on the ban of uncovered sovereign CDS trades and exemptions that are provided to market shares.

The rules compel short sellers of shares to make prior deals to borrow them beforehand. Shorting of sovereign debt by purchasing credit default swaps (CDS) is prohibited unless the seller is protected against losses such as by hedged long positions. The law replaces the rig of national shorting bans, specifically on banking stocks that were launched by member states in an attempt to curb markets during fiscal crisis.

In the second quarter, Greece extended its ban on short-selling bank shares until the end of the quarter while its banks are being re-capitalised as mandated by ESMA under the amended EU policy.