Published: 31st August 2012

As will be known – e.g. see Regulatory Roundup 21 – the European Commission has the goal of harmonising short selling rules. EU 236/2012, being a Regulation ‘on short selling and certain aspects of credit default swaps’, will come into effect on 1 November 2012. Being a ‘regulation’ rather than a ‘directive’ means that it will have direct effect in UK law with no need for implementing measures in domestic legislation.

The current FSA rules on short selling are, of course, in FINMAR and basically require disclosure of short positions – 0.25% or more – in UK financial sector companies (ongoing disclosure obligation) or securities which are subject to a rights issue, but please see FINMAR 2.2 for the precise details.

The changes to the short selling regime mean that restrictions will be placed on uncovered short sales in: sovereign debt (see Article 13(1) with limited exemption set out in Article 13(2)); shares admitted to trading on a trading venue (Article 12); and sovereign CDS (Article 14(1)).

Article 2 provides definitions of terms e.g. ‘trading venue’ will include regulated markets and MTFs as per MiFID.

Reporting obligations are set out in Articles 5 and 6 (shares) and Article 7 (sovereign debt).

From the same date, public disclosures of net short positions in shares (public disclosure will be required at the 0.5% level) through a Regulatory Information Service e.g. RNS will no longer be required – instead disclosures will be published on the FSA website; further details of this web-based solution are awaited. Market Watch 42 (MW42) informs us that those making disclosures will be required to do so using the fields set out in Table 2 of Annex I of Commission Delegated Regulation (see link).

Apart from public disclosure, net short positions in shares of 0.2% and above need to be notified to the Regulator and again the FSA is working on a web-based solution. Disclosure to the Regulator will also apply to short positions in sovereign debt (either at the 0.1% or 0.5% levels – see Chapter VI, Article 21 of Delegated Regulation for details).

Under a transitional provision existing national short selling measures can continue in parallel with EU regulation until 1 July 2013. However MW42 informs us that the FSA will be consulting on proposals to remove the current FINMAR short selling rules with effect from this coming 1 November and indeed CP12/21 – “Short selling regulation – Handbook changes” – followed on the heels of MW42.

The proposed changes to the Handbook can be found in Appendix 1. Basically FINMAR 2.2 to 2.4 inclusive are deleted in their entirety

The majority of the proposals within CP12/21 are based upon anticipated UK legislation as a result of the change to the short selling regime – changes to FSMA and related legislation – so, depending upon how that turns out, there may be need for a few last minute changes to what is proposed in CP12/21.

Comments on CP12/21 are invited by 20 September.

The FSA will not be producing FAQs regarding the new regulations – that will be left to ESMA – although they will respond to specific questions; see page 3 of MW42 for the FSA link.

Firms should now be giving thought to what procedural and system changes may need to be put in place to ensure compliance with the new regime from 1 November.

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