The Council of the European Union (the “Council”) has adopted a regulation (the “Regulation”) on short selling and certain aspects of credit default swaps (“CDS”), which aims to create a harmonised short selling and sovereign CDS regime across the European Union (the “EU”) and also to align the powers that regulators from different member states may use in exceptional circumstances. The Regulation was published in the Official Journal of the EU on 24 March 2012 and will come into force on 1 November 2012 at which time it will become directly applicable in all EU member states.

Background

As we have mentioned in previous updates, the Regulation was conceived out of the need to harmonise the fragmented approach of different regulators throughout the EU towards restricting short selling and the use of CDS, which, according to the Council in its press release on the adoption of the Regulation, limits the effectiveness of adopted measures and results in regulatory arbitrage. The Regulation seeks, in particular, to improve the transparency related to significant short positions and address risks of negative price spirals and settlement failures, especially in relation to uncovered or ‘naked’ short selling. This update summarises the main provisions of the Regulation, describes major changes from previous texts of the Regulation, and considers the Regulation’s potential implications in practice.