On July 8, the Committee of European Securities Regulators (CESR) published a consultation paper outlining its proposals for a pan-European harmonized and permanent short selling disclosure regime.  

CESR proposes a two-tier disclosure system for the disclosure of significant net short positions held in shares admitted to trading on regulated markets or multi-lateral trading facilities (MTFs) in the European Economic Area. When a short position reaches a specified initial threshold (CESR’s proposal is 0.10%), the short seller will be required to make a private disclosure to the regulator of the most liquid market for the share in which the position is held. Further disclosures will be required at increments of 0.10%. If the position reaches a second-tier threshold (CESR’s proposal is 0.50%), the short seller will then also be required to make a public disclosure. Further disclosures will be required if the short position crosses subsequent incremental 0.10% thresholds. Disclosure will also be required when the positions which had previously been disclosed fall below any of the disclosure thresholds down to the initial disclosure threshold. Disclosure reports will be required to be made on the trading day after the day on which the relevant threshold is passed.  

The proposed disclosure regime will apply to instruments with the economic effect of holding a short position and will include positions held in exchange-traded and over-the-counter derivatives. Long positions will be netted against short positions to calculate whether disclosure thresholds were met.  

In the consultation, CESR explicitly acknowledged the fact that short selling plays an important role in financial markets, contributing to efficient price discovery, increasing market liquidity, facilitating hedging and other risk management and possibly helping to mitigate market bubbles. CESR also acknowledged that short selling could be used in an abusive fashion to distort the prices of financial instruments, thereby contributing to disorderly markets. The consultation will close on September 30, and a final proposal will be made to the European Commission for its consideration by the end of 2009.  

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