EU Short Selling Regulation
On 14 March 2012, Regulation (EU) No.236/2012 on short selling and certain aspects of credit default swaps was published in the Official Journal of the European Union. It entered into effect on 1 November 2012. Among other matters, the Regulation:
introduces a ban on uncovered sovereign CDS;
imposes a prohibition on uncovered short sales of shares and sovereign debt, subject to the requirement: (i) for shares - that an arrangement has been entered into with a third party which gives the person a reasonable expectation that settlement can be effected when due; and (ii) for sovereign debt – that an arrangement has been entered into with a third party which has confirmed that sovereign debt can be delivered in time for settlement;
introduces an EU-wide notification and reporting regime for shares, whereby holders of significant net short positions must notify their positions privately to the relevant competent authority when they exceed or fall below 0.2% of the issued share capital of the issuer company; and must publicly disclose these (on a named basis) when they exceed or fall below 0.5%. In each case, further notification or reporting is required at each 0.1% above the initial threshold;
introduces an EU-wide notification regime for sovereign debt, whereby holders of significant net short positions must notify their positions privately to the relevant competent authority when they exceed: (i) for sovereign issuers with €0-500bn outstanding debt - 0.1% of the total outstanding amount of issued sovereign debt and each 0.05% above this; and (ii) for sovereign issuers with over €500bn outstanding debt or where there is a liquid futures market – 0.5% of outstanding issued sovereign debt and each 0.25% above this;
provides national competent authorities and ESMA with additional powers to intervene in the markets in times of stress; and
excludes sales under repo agreements or futures contracts from the definition of short sales in shares and debt instruments.
The European Commission with the assistance of ESMA has reviewed the appropriateness of and operational issues surrounding certain provisions of the SSR. The European Commission released its final report in December 2013. Overall, the report concludes that, despite being too early to draw firm conclusions, the operation of the SSR to date has had a positive impact on transparency of short sales and reduced settlement failures, although a slight negative impact upon price discovery. The report also concludes that no compelling evidence exists of major negative effects on the liquidity of EU sovereign CDS markets.
During 2012, the UK brought a legal challenge before the Court of Justice of the European Union for the annulment of Article 28 of the SSR on the power for ESMA to adopt emergency measures. Despite the positive opinion of the Advocate General, the CJEU held that no breach of EU principles had occured and dismissed the action in its entirety.
Regulation 236/2012 on short selling and certain aspects of CDS (March 2012)
European Commission Delegated Regulation (EU) No. 918/2012 – definitions, calculation of net short positions, covered sovereign CDS, notification thresholds, liquidity thresholds, significant falls in value and adverse events (July 2012)
European Commission Delegated Regulation (EU) No. 919/2012 – RTS on fall in value for liquid shares and other instruments (July 2012)
European Commission Delegated Regulation (EU) No. 826/2012 containing Regulatory Technical Standards (June 2012)
European Commission Implementing Regulation (EU) No. 827/2012 containing Implementing Technical Standards (June 2012)
ESMA Guidelines on the exemption for market making activities and primary market operations (February 2013)
ESMA 2nd Update of Q&As on the Short Selling Regulation of January 2013 (January 2013)
Consultations, legislative process and related AIMA documents
Judgement in Case C-270/12 UK v Parliament and Council (January 2014)