The EU will head into the summer with approval for two of the largest pieces of financial- services legislation still a remote prospect.

Despite weeks of negotiations, no agreement has emerged between member states and MEPs on regulating short-selling – a practice many observers blame for exacerbating the eurozone’s sovereign-debt crisis.

As part of the legislation, MEPs want an outright ban on ‘naked’ credit default swaps (CDS) on sovereign debt – where the buyer does not own the underlying government bond. This is far tougher than the agreement reached by finance ministers in Brussels on 17 May.

The compromise deal thrashed out by member states did not go so far as to ban short-selling outright, including instead a ‘get-out clause’ that would permit restrictions to be lifted in exceptional market conditions. The UK and the Netherlands head the countries that fear a complete ban would impede recovery from the financial crisis, because it would increase the costs for governments seeking to raise money to finance their debt.

Four formal meetings between the Council of Ministers, the European Parliament and the European Commission in June bridged some of the technical differences between the parties. But a deal on the broader issues remains elusive, and talks are set to continue during July and August.

Power of veto

The areas of disagreement extend beyond bans on naked CDS: the Parliament and national governments are still at odds over the power of the European Securities and Markets Authority (ESMA), a supervisory agency that started work at the beginning of this year. Member states have indicated that they want a power of veto over ESMA decisions, something that the Parliament opposes.

Pascal Canfin, a French Green MEP who is leading the Parliament’s negotiations on the subject, said member states were being “intransigent”. Sovereign- debt speculation “continues to cause chaos and undermine the fiscal viability of EU member states”, he said. In his view, for any agreement to be reached, “the ball is now in the court of member state governments”. The two sides must agree before the legislation can come into effect.

The Parliament was planning to vote on the issue at its plenary session on Tuesday (5 July), but postponed this until after the summer in the hope that agreement can be reached by then.

Short-selling is not the only piece of financial services legislation that has missed the original target of pre-summer completion.

Legislation to clamp down on derivatives trading is still a long way from agreement, with member states split on the issue. MEPs want new laws to affect only over-the-counter (off-exchange) derivative trading. Some member states share this approach, but others, led by the UK, want rules to cover all derivatives, not least because this would help ensure competition between clearing houses.

The Parliament postponed its vote on the subject on Tuesday in the hope that member states can reach a common position before the autumn.