Short Selling Regulation

Reference text: European regulation 2010/0251 (COD)

Date of application: 1 November 2012

This regulation stems from two events that marked the financial world: the financial crisis in 2008, followed by the strong movements on sovereign debts. The financial crisis which followed the collapse of Lehman Brothers obliged regulators, more or less everywhere in the world, to take measures aiming to restrict short selling. These initial measures were taken as a matter of urgency without any real global coordination or coherence.

The objective of this regulation is to construct a preventative framework (comprising permanent measures, alongside temporary measures that can be activated by the competent authorities in exceptional situations), that is reasoned (the project does not undermine the benefits that short selling can entail under normal market conditions and exempts certain activities) and harmonised, aiming to govern short selling of shares and sovereign debts and the use of CDSs on sovereign debts. Such a framework is only fully effective of course if it is accompanied by a reinforcement of the powers granted to the local competent authorities and the ESMA, and an increase in the transparency necessary to exercise their function. The text thus specifies the role of the various competent authorities and stresses the need for cooperation among them.

Mainly targeted at investors (corporate entities and private individuals), the text covers short selling according to two themes:

• an obligation for declaration to the authorities (possibly accompanied by a public version),

• the obligation to have taken all necessary measures to enable settlement of the sale on the correct date. Concerning CDSs, it prohibits them from negotiating “naked”, i.e. without having a long position to hedge over the debt itself.

It should be noted that the text also imposes on Clearing Houses the establishment of penalties for lateness and a harmonised buy-in procedure (activated 4 trading days after the theoretical settlement date) in line with what seems set out in the proposed regulation on central securities depositories. It is furthermore not the only case of connection between the proposed texts of the EC: the marking of short selling orders, once envisaged in this regulation, seems to have been finally abandoned to the benefit of marking of transactions that could be easily carried out through Transaction Reporting as set out in the future MiFIR  However as the Transaction Reporting is to be done by the entity executing the order, it is no more than a marking of orders since the seller will have to flag the order when sending it for execution. The only difference is that only executed orders will be declared..

Current situation

The text was adopted by European Parliament on 14 March 2012 and published in the OJ on 24 March 2012.

The ESMA published its proposal concerning technical standards (28 March 2012) and its opinion on level 2 measures (19 April 2012).

On 5 July 2012, the European Commission adopted delegated acts and technical standards proposed by the ESMA.Technical standards have been published on the EU JO on the 18 September.

On 17 September ESMA issued a consultation regarding exemptions linked the market making activity. Answers were expected for the 5 October at the latest.
In the meantime, buy-in procedures have been modified by CCPs in order to comply with this new regulation, going beyond the initial scope of the Regulation (shares and sovereign debts).

On 10 October: first update of the ESMA’s Q&A (first version dated 13th of September).

On 22 October: publication of the list of “Links to national websites for the purpose of the notification of net short positions”

1 November 2012: Implementation

9th of November: publication of the list of exempted shares (those whom principal trading venue is located in a third country)
Publication of the table of the net short notification thresholds for sovereign issuers

10th of December: mandate given to ESMA for technical advice on the evaluation of this regulation (deadline 31st of May 2013)

January 2013: second update of the ESMA’s Q&A (previous one dated 10th of October)
1st February: publication of ESMA’s guidelines on market making and primary market exemptions

12th February : ESMA published a “call for evidence” in order to prepare its technical advice on the evaluation of the regulation; answers expected for the 15th of March.

Next Steps

ESMA’s technical advice on the evaluation of this regulation to be issued (31st of May 2013)

Find out more

Commission delegated regulation Projects
Reference text

SGSS contact: Sylvie Bonduelle

Source: SGSS' Regulatory Review - Main Market Initiatives