Published: 1st October 2010

An article on short selling in Regulatory Roundup 10 advised that a CESR report recommended the introduction of a pan-European short selling disclosure regime.

The European Commission has now published a proposal to harmonise short selling rules across the EU.

In line with the CESR report, the proposal would require disclosure to the regulator of a net short position which reaches, or falls below, the equivalent of 0.2% of a company’s issued share capital (and each 0.1% thereafter). Disclosure to the market would be required when a short position of 0.5%is reached (and again for each 0.1% thereafter).

The regime would be complemented by a requirement for all short orders to be flagged, with the relevant trading venue publishing daily volume summaries of such orders. Article 8 of the proposal sets out the regime applicable to short positions in sovereign debt and any CDS relating to sovereign debt issuers; the relevant notification level and incremental levels will need to be specified by the Commission.

Naked short selling will be restricted and will include the need for an investor to have borrowed the instruments before entering into a short sale (see Article 12 of the proposal for full details). There are exemptions from the proposals for market making activities; primary market operations; and where a share’s principal market is outside the EU (Articles 14 & 15). The proposal does not provide for a permanent ban on a naked CDS (where the buyer acquires in order to take a position and not to hedge a risk).

The proposals would also confer significant powers on regulators to restrict short selling in exceptional situations. The European Securities and Markets Authority (ESMA) would be given the central role of co-ordinating action.

As firms will be aware, the current shorting rules are contained in FINMAR 2.2 where a disclosable short position arises at the 0.25% level (Regulatory Roundup 20 provides access to a summary of the shorting rules in FINMAR).

If adopted by the European Parliament and the Council, it is intended that the regulation would apply from 1st July 2012.

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