Regulatory prospects: 2012 and beyond

Regulation of short selling and certain aspects of Credit Default Swaps

The text, which was approved by the European Parliament on 15th November 2011, must now be formally adopted by the European Council in order to come into effect in November 2012, the date currently set.

The objective of this regulation is to build a preventive framework (made of permanent measures complemented by temporary measures that can be activated by the competent authorities), that is rational (the draft does not question the benefits that short selling can provide in normal market conditions and exempts certain activities) and harmonised, aimed at regulating the short selling of shares and of sovereign debt, as well as the use of CDS’s. Such a framework is only meaningful if it is accompanied by; a strengthening of the powers assigned to the competent local authorities and to ESMA, and by an increase in transparency, which is necessary for the exercise of their function. The text therefore specifies the roles of the various competent authorities and stresses the need for cooperation between them. Essentially aimed at the investor (corporate entity or individual), the text deals with short selling from two aspects: a declarative (potentially public) obligation and the obligation to have taken all the necessary steps in order to enable the settlement of the sale on time. With regard to CDS’s, it prohibits “naked” short selling.

The text also requires the Central Counterparties (CCP) to put in place penalties on settlement fails and a harmonised Buy-in procedure (triggered 4 business days after the intended settlement date). It should be noted that this proposal is in line with the one contained in the draft regulation on Central Depositaries (CSD’s). Moreover, it is not the only instance of a connection between the proposals in EC texts. The earmarking of short selling orders, which was envisaged in this regulation for a while, seems to have been finally abandoned in favour of the marking of transactions which could be easily achieved using Transaction Reporting as specified in the future MiFIR regulation.