Michel Barnier welcomed the agreement at the Trialogue stage on the content of the Regulation on Short Selling and CDSs. He said the measures would help ensure transparency, stability and responsibility in CDS markets. He welcomed in particular the agreement on naked CDSs, saying this would ensure sovereign CDSs were used as they are supposed to be, to hedge against the risk of sovereign default, without putting at risk the functioning of sovereign debt markets. A set of FAQs sets out key elements of the Regulation, including the reporting thresholds for share short selling, and requirements for reporting sovereign bond short positions. It also explains the difference between the expectations when a firm engages in naked short selling of shares and the tailored regime for sovereign debt.

For the shares regime, an investor must have:

  • borrowed the instruments concerned;
  • entered into an agreement to borrow them; or
  • an arrangement with a third party under which that third party has confirmed that the share has been located and has taken measures necessary for the investor to have reasonable expectation that settlement can be effected when it is due.

The Commission acknowledged plans to consider in the MiFID Review options including transaction reporting, position reporting and the possibility of position limits, which could complement the short selling proposals by providing additional tools to detect and guard against possible systemic risks and risks to market integrity. In the context of the MAD review, it will be looking at extending the prohibition of market manipulation to all over-the-counter instruments, including derivatives, which could affect the prices of financial instruments traded on a regulated market, MTF or OTF. The Commission says this option would complement the short selling regulation by providing regulators with the tools to sanction possible market manipulation of underlying bond markets through CDS. The FAQs say it is expected the adopted Regulation will be published in the Official Journal in January 2012 and that, by the time it comes into force in November 2012, the Commission must have made implementing legislation and ESMA must have published technical standards. (Source: Barnier Welcomes CDS Agreement and FAQs on CDS Regulation)