Not that this affects me BUT

BRUSSELS (Dow Jones)--The European Union is set to approve legislation that could limit the use of naked short-selling on credit default swaps, sovereign bonds and stocks, say people familiar with the matter.

European Union lawmakers will hold a meeting on the proposal Tuesday evening. Several important details have to be worked out, including a possible opt-out. However, the rules are expected to require traders to clearly report short positions and give regulators the power to ban naked short-selling during exceptional circumstances. An option for a complete ban on naked CDS positions tied to sovereign bonds is also under discussion.

Naked short-selling is when an investor bets against a financial product without holding the underlying asset. CDS contracts allow investors to buy insurance against the default of an underlying asset, like a Greek bond.

France and Germany in particular have blamed short-selling of sovereign debt for exacerbating the euro-zone debt crisis.

In May, European Union finance ministers reached an agreement on EU-wide rules that would allow restrictions on short-selling of shares and sovereign debt. But, Germany, alongside the European Parliament, has pushed for credit default swaps to be added to the list. Agreement with Parliament is the last step in the EU's law-making process.

Germany has already banned naked short-selling of certain stocks and sovereign debt of euro-zone countries, as well as of euro-zone sovereign debt credit default swaps since 2010, the German finance ministry said.

Still, the EU proposal includes an opt-out for member states concerned that a ban could impact market liquidity. But it remains unclear how long the opt-out would operate for and the details of when it could be used. The Parliament's proposal would limit the opt-out to 12 months, according to a person familiar with the situation.

Also still under negotiation is how much power the new pan-EU securities regulator, the European Securities and Markets Authority, will have in imposing limits itself.

Since August 12, France, Belgium, Italy and Spain have banned the short-selling of certain financial stocks amid high market volatility. Greece also imposed a temporary ban on certain stocks.

Earlier this year, the Association for Financial Markets in Europe said restrictions on shorting sovereign debt via credit default swaps will push sovereign and corporate borrowing costs up, damaging the economy.

Sander Schol, director at AFME, said the move "impairs the ability for companies and pension funds to manage credit risk and will be potentially harmful in managing systemic risk."

-By Riva Froymovich, Dow Jones Newswires; +32 2 741 1489; riva.froymovich@dowjones.com

(Matthew Dalton, Bernd Radowitz, and Mark Brown contributed to this article.)

(END) Dow Jones Newswires

October 18, 2011 10:00 ET (14:00 GMT)