Published: 12th March 2010

CESR has presented a report to the European Institutions that recommends the introduction of a pan-European short selling disclosure regime. There are two distinct differences between the existing disclosure requirements in MAR 1.9 and the new CESR Proposals.

Firstly, in MAR 1.9, the short selling disclosure requirements apply only to UK financial sector stocks and securities which are the subject of a rights issues. CESR’s proposed short selling disclosure regime has no such restrictions (although see below) and applies to any transaction which provides economic exposure to a particular share – therefore exchange traded and OTC derivatives as well as short positions in cash markets will be covered by the disclosure requirements. Secondly CESR’s proposed short selling regime allows for private (to the regulator) disclosure in respect of small positions whereas MAR requires disclosure on a RIS.

The disclosure thresholds are also different.

The current position in the UK for required disclosure currently start at 0.25%, and thereafter in increments of 0.1%, and must be made via a RIS no later than 3:30pm the following business day.

In the CESR proposals a net short position reaching the threshold of 0.2% would trigger a disclosure obligation to the relevant authority, and every 0.1% thereafter would trigger further disclosures. Should a short position reach the threshold of 0.5% (and for further steps of 0.1% thereafter), then disclosure to the market as a whole, in addition to the regulator, would be required. When the short position threshold is reached, the disclosures would need to be made by the end of the following trading day.

The CESR disclosure rules would apply to net short positions in all shares that are admitted to trading on an EEA regulated market and/or an EEA Multilateral Trading Facility (MTF) but not when the primary market of those shares is located outside the EEA. Market making activities would be exempt.

After the SEC eliminated all short sale price tests and freely allowed short selling in 2007, then temporarily banned short selling on many stocks for 14 trading days during the financial crisis, the SEC has now finalised Rule 201 and amended Regulation SHO to place additional limitations on traders that restrict short selling again in limited circumstances (Regulation SHO was enacted in 2005 to ensure broker-dealer stock availability and transaction delivery).

This newly adopted rule contains a ‘circuit breaker’ for when a stock drops more than 10% and a price test, the ‘alternative uptick rule’. The alternative uptick rule allows short selling only at a price above the current national best bid.

Rule 201 will apply on the day of the 10% drop in price of the stock and also the day after. It will apply to all equities listed on exchanges and the OTC market, and will become effective 60 days from the date of publication of the release in the Federal Register (i.e. roughly 2 months from now) giving six months for market participants to comply.

A link to the Amendments to Regulation SHO can be found at:

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