European Commission Adopts Detailed Rules on Short Selling

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On June 29 and July 5, the European Commission announced detailed rules under EU Regulation 236/2012 on Short Selling and Certain Aspects of Credit Default Swaps (the Short Selling Regulation). The Short Selling Regulation was adopted on February 12 (as reported in the February 24, 2012 edition of Corporate and Financial Weekly Digest). The detailed rules are based on work by the European Securities and Markets Authority (ESMA) including its March 30 consultation covered in the April 13, 2012 edition of Corporate and Financial Weekly Digest. For technical reasons they are divided among four separate instruments: an implementing regulation, a delegated regulation, a delegated act and regulatory technical standards.

The detailed rules address the following issues:

  • method and format of disclosure of information on significant net short positions to relevant national regulators;
  • requirements for locate agreements to ensure settlement of permitted short sales of shares and sovereign debt;
  • types of third parties, including investment firms and central counterparties, and the requirements they must meet to be eligible to enter into arrangements with short sellers to ensure settlement;
  • format and content for the periodic information on net short positions to be provided to ESMA by national regulators;
  • technical rules for ESMA to determine whether the principal trading venue of a share is inside or outside the European Union and subsequently implement the exemption in the Short Selling Regulation for shares whose principal trading venue is outside the European Union;
  • details of the information on short positions that must be notified to national regulatory authorities and disclosed to the public;
  • details of the requirements to be met in order for sovereign credit default swaps (CDS) to be considered covered and therefore permitted – quantitative and qualitative correlation between the sovereign CDS and the hedged assets/liabilities;
  • how to calculate the significant short positions that must be disclosed to regulators or the market;
  • how short positions are calculated and reported by fund managers managing several funds, or other different entities within a group;
  • levels at which short positions on sovereign debt must be notified to regulators;
  • thresholds for different financial instruments which can trigger a short term suspension of short selling by regulators; and
  • the decline in liquidity which permits Member States to suspend restrictions on uncovered short sales of sovereign debt.

The detailed rules will all apply November 1, 2012, when the Short Selling Regulation comes into effect.

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