An EU Regulation on short selling entered into force on 1 November 2012, so that all EU countries will in the future have uniform provisions on short selling and notification of short positions in a share issued by a company or in a debt instrument issued by a sovereign issuer. The Regulation aims at improving market transparency and investor protection and is applied to all investors regardless of their place of residence.
This is particularly significant for Finland, as the notification and restriction of short selling was not previously regulated in Finland. The Regulation imposes a blanket ban on naked short selling, meaning that sellers will need to ensure the availability of the investment instruments before the sale. At the same time, the Regulation gives a supervising authority, which in Finland means the Financial Supervisory Authority, the authority to restrict or completely prohibit short selling in exceptional circumstances, for example during a serious financial crisis.
The Regulation also obligates investors to notify short positions to authorities soon after purchase if a net short position in relation to the issued share capital of a company that has shares admitted to trading on a trading venue reaches, exceeds or falls below the threshold of 0.2 percent of the company’s issued share capital. Once the threshold has been exceeded, a new notification must be submitted for each 0.1 percentage point increase or decrease in the position.
Similarly, a net short position in issued sovereign debt must be notified where such a position reaches, exceeds or falls below notification thresholds set by the European Securities and Markets Authority individually for different issuers of sovereign debt. Concerning debt issued by the Finnish government, the notification obligation arises where a duration-adjusted position reaches, exceeds or falls below the threshold of 0.10 percent and each 0.05 percent above that. The Financial Supervisory Authority will publish on its web pages net short positions in shares – but not in sovereign debt – exceeding the threshold of 0.5 percent.
The net position calculation in respect of shares in funds which are managed on a discretionary basis by a management entity takes place at fund or fund manager level. At individual fund (portfolio) level, only the calculation of net short positions for each particular issuer takes place. Only the positions of the funds that are net short in the particular issuer i.e. pursuing the same investment strategy (being short), should be aggregated to determine the net short position at the management entity level and whether a threshold is reached, exceeded or crossed downwards warranting reporting and, where relevant, disclosure of the aggregated net short position in that particular issuer.
In the case of umbrella fund structures, the calculation of net short positions must take place at the level of the respective subfunds. In the case of master-feeder structures, it takes place at the level of the respective master fund. For a particular issuer of share capital, the calculation should also include all positions held by individual funds through indices where that issuer is represented and in accordance with its weight in the index.