On 29 June, the Hellenic Capital Market Commission (HCMC) imposed a temporary prohibition of transactions in any financial instrument which would create a short position in shares admitted to trading on the Athens Exchange and the Multilateral Trading Facility of “EN.A” (Alternative Market of the Athens Exchange). The prohibition applies from 00.01 on 30 June until 23.59 on 6 July.
We have set out below key questions and answers in respect of the rules underpinning the action taken by the HCMC. We have concentrated on the rules relevant to securities and note that the Short Selling Regulation contains different rules in relation to sovereign debt.
Practical steps and issues for market participants and their advisors to consider as a result of these prohibitions include:
- The prohibition is very broad and includes derivative positions and other synthetic exposures which would have the effect of creating or increasing a short position.
- There is some uncertainty as to the exact scope of the prohibition including whether it prevents entering into a short position through an index with a de minimis exposure to the securities subject to the prohibition.
- Under the relevant rules, a short position is broadly a position resulting from either (i) a short sale in the relevant security or (ii) entering into a transaction which creates or relates to any financial instrument where at least part of the effect of the transaction is to confer a financial advantage on the person entering into that transaction in the event of a decrease in the price or value of the security.
- Any short position is caught even if the natural or legal person has a long position in the same security that it would use to off-set the short position when determining its reporting obligations.
- Positions entered into before 00.01 on 30 June are un-affected by the prohibition, but firms may need to consider whether any additional arrangements need to be put in place in order to settle open positions when due.
- There is no exemption from the prohibition for desks operating under the market-maker exemption.
- Firms may wish to consider enhanced monitoring of client orders in relation to the relevant securities to ensure they do not inadvertently assist a client breaching the prohibition.
We have set out below key questions and answers in respect of the rules underpinning the action taken by the HCMC. We have concentrated on the rules relevant to shares and note that the Short Selling Regulation contains different rules in relation to sovereign debt.
What rules enable the HCMC to take this action?
Since 1 November 2012 short sales of securities listed on EU regulated markets and multi-lateral trading facilities and European sovereign debt has been governed by the Short Selling Regulation (Regulation (EU) No 236/2012) (the SSR).
To whom do the rules apply?
The SSR applies on an instrument basis and therefore the restrictions apply to all natural and legal persons in and outside the EU in respect of their trading in European shares traded on regulated markets and multi-lateral trading facilities (Shares) or sovereign debt.
What are the key provisions?
Generally, in respect of Shares, the SSR imposes a ban on uncovered short sales (that is, entering into short sales of European Shares without having taken certain prescribed steps to ensure that the relevant Shares can be obtained to ensure settlement can be made when due) (article 12) and also imposes certain transparency requirements in respect of an entity’s net short position (articles 5 and 6).
More specifically, article 20 provides that in exceptional circumstances a competent authority can either prohibit or impose conditions:
- on short sales that would otherwise be allowed by the SSR; or
- on transactions other than a short sale which create, or relate to, any financial instrument (i.e. any MiFID financial instrument not only Shares) and the effect or one of the effects of that transaction is to confer a financial advantage on the entity entering into the transaction in the event of a decrease in the price or value of another financial instrument (i.e. a short position).
This power can be used where:
- there are adverse events or developments which constitute a serious threat to financial stability or to market confidence in the Member State concerned or in one or more other Member States; and
- the measure is necessary to address the threat and will not have a detrimental effect on the efficiency of financial markets which is disproportionate to its benefits.
The prohibition by HCMC has been made using its power under article 20.
Is there a process that must be followed for a competent authority to use its article 20 power?
Before imposing a restriction under article 20, the competent authority must notify ESMA and the other EU competent authorities of the measure that it proposes. In normal circumstances this must be done 24 hours before the measure comes into force.
ESMA then has 24 hours to issue an opinion as to whether it considers the proposed measure is necessary to address the exceptional circumstances and whether it is proportionate.
The competent authority must then publish on its website a notice setting out the measure it has taken. The measure takes effect when it is published or as stated in the notice and only applies to transactions entered into after the measure has taken effect.
How long can the measure last?
Article 24 provides that the measure can last for a maximum initial period of 3 months from the date of publication but it can be renewed for an unspecified number of 3 month periods provided the process above is followed each time a renewal is requested.
What are the penalties for breaching measures imposed under the SSR?
The SSR mandates each Member State to establish its own penalties. ESMA has published a summary of the applicable penalties of each Member State here.
If the transgressor is outside the EU, we think that the better view is that the penalties of the member state responsible for the relevant regulated market will apply.
The SSR requires competent authorities to cooperate with each other and (where possible) to enter into co-operation agreements with supervisory authorities of third countries to assist exchange of information and enforcement. The FCA has a Memorandum of Understanding in place with FINRA to facilitate the exchange of information and investigatory assistance. There does not appear to be a memorandum of understanding in place between FINRA and HCMC.