The Short Selling Regulation
(Regulation (EU) No. 236/2012) (the
"SSR") and the European Commission Level
2 technical standards apply from 1 November 2012.
The SSR has been given effect in Ireland through S.I. No. 340 of
2012 (The European Union (Short Selling) Regulations 2012.
The SSR aims to address certain systemic
risk concerns with naked short selling raised at the height of the
financial crisis in 2008.
Its objectives are to establish a
harmonised and consistent approach by Member States in dealing with
exceptional situations in the market place and to establish a
common framework surrounding short selling and credit default swaps
("CDS") within the European Union
("EU").
The SSR applies to financial instruments
admitted to trading on a trading venue in the EU (and where traded
outside a trading venue); derivatives as defined in the Markets in
Financial Instruments Directive (2004/39/EC) and debt instruments
issued by a Member State.
The following are excluded from the
definition of short sale under the SSR:
- futures contracts or other derivatives where there is an agreement to sell securities at a specified price at a future date;
- repurchase with specified pricing; or
- transfers under securities lending agreements.
In the context of investment funds, the SSR requires collective investment schemes to make regulatory notifications and public disclosures when the underlying financial instruments in funds managed reach or fall below the set thresholds. Specific guidance on the calculation of net short positions has been set out in the delegated regulations and summarised in this memorandum.
Net Short Positions
Under the SSR, short selling is only permitted if sellers have:
- borrowed the shares or sovereign debt;
- entered into a binding agreement to borrow the shares or sovereign debt; or
- an arrangement with a third party whereby they can reasonably expect to deliver the shares or sovereign debt they are selling (locate rule).
The key being that the
shares or sovereign debt sold short is available for
settlement.
Uncovered or naked short selling of
sovereign CDS is prohibited under the SSR. However, short selling
of sovereign CDS is permitted and deemed to be covered in
circumstances where the shorting serves to hedge a long position in
debt instruments of an issuer when the pricing has a high
correlation with the pricing of the sovereign debt.
The delegated regulations set out
details on the quantitative and qualitative tests required to prove
this correlation.
Transparency Requirements
The SSR requires information on
net short selling of shares or sovereign debt to be notified to the
relevant competent authority by 3:30pm on the day following the
shorting once a reporting threshold has been reached.
In the case of shares the private
regulatory reporting threshold is 0.2% of the company's issued
share capital and each 0.1% above that threshold. When the
threshold has been reached or falls below the set levels, a private
notification requirement is triggered.
The details of the content of such a
private notification is set out in the delegated regulations and
includes details of the position holder, their address, contact
details, the reporting date, the percentage details and other
information.
In addition, there is also a public
disclosure requirement where information on net short positions
will be available to the public in circumstances where the
threshold of 0.5% of the company's issued share capital and
each 0.1% above that has been reached and also where it has fallen
under. Details of the content of such notifications are set out in
the delegated regulations and include the name of the position
holder, name of the issuer, ISIN, percentage of net short position
of issued share capital and the position date.
The information disclosed through the
public notification will be posted on a central website operated or
supervised by the relevant competent authority. The European
Securities and Markets Authority
("ESMA") will put a link to these
central websites on its website.
Of relevance is that the notifications
both private and public are not necessarily made to a regulated
entity's competent authority, rather the notifications are made
to the competent authority in the jurisdiction of domicile of the
principal trading venue where the underlying shares or sovereign
debt is listed.
The sovereign debt thresholds for private
regulatory reporting notifications are set out in detail in the
delegated regulations on a scaled basis depending on the total
amount of outstanding issued sovereign debt
("ISD") i.e. 0.1% threshold where ISD is
between €0 and €500 billion and a 0.5% threshold where
ISD is above €500 billion.
There is no public disclosure requirement
in respect of sovereign debt as the publication of this information
may have a detrimental effect on sovereign debt markets.
Practicalities for Investment
Funds
Investment funds shorting shares
or sovereign debt should be aware of their notification and
disclosure obligations under the SSR. For example:
- generally notification to relevant competent authorities will be carried out by the investment manager;
- investment funds and managers may need to review current procedures in place to ensure notification is made;
- investment funds may also need to review legal agreements in place with delegates in order to determine which entity will calculate and duly notify where required; and
- systems should be reviewed to determine whether an entity can satisfy the five year retention requirements.
Chapter IV of the delegated
regulations sets out the method for calculating net short positions
in funds managed. Where funds are managed on a discretionary basis,
the calculation and notification obligations will fall on the
discretionary manager.
The net short positions will be
calculated on an aggregate basis where the same investment strategy
is pursued for a particular issuer and notifications will be made
to the relevant competent authority when thresholds have been
reached.
The calculation of net short positions
needs to take account of economic interests, obtained directly and
indirectly, through derivatives such as options, futures, indices,
baskets of securities and exchange traded funds.
Notifications and
Disclosures
ESMA has published lists of links to national
websites relating to the notification and disclosure of net short
positions:
http://www.esma.europa.eu/news/ESMA-publishes-two-lists-links-national-websites-relating-notification-and-disclosure-net-short
The position holder in respect of Irish net
short positions are required to register with the Central Bank of
Ireland at least two business days before notifications are
made.
The respective registration, notification and disclosure forms are
available on the Central Bank of Ireland's website:
http://www.centralbank.ie/regulation/securities-markets/shortselling/Pages/Forms.aspx
Exemptions
Subject to compliance with certain requirements, the SSR have issued some exempted categories from the notification and public disclosure requirements and include:
- firms carrying out market making or primary dealing activities; and
- where the principal trading venue is in a third country.
In order to use these exemptions certain notifications need to be made within the specified timeframes set out on ESMA's website:
http://www.esma.europa.eu/page/Short-selling
Originally published 1 November 2012
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.