On September 15, 2010, the European Commission published draft legislation for the regulation of short selling of European securities (the Legislation). Intended to harmonize short-selling disclosure requirements across Europe, the Legislation imposes a new two-tier short selling disclosure regime for issuers which have shares admitted to trading on a regulated market within the European Union (and for short positions created by over-the-counter trading and derivatives). Positions that reach, exceed or fall below 0.2% must be privately disclosed to the national regulators, while positions that reach, exceed or fall below 0.5% must be publicly disclosed. There will be additional notifications required for each change of more than 0.1% above each threshold. To enable national regulators to obtain additional information about short selling volumes, all share orders involving a short sale are to be marked as short by the executing brokers and trading venues are to publish daily summaries of the volume of orders marked as short orders. Additionally, "significant" short positions in sovereign bonds and credit default swaps on sovereign debt issuers are to be privately disclosed to the regulators. It has not yet been determined what will constitute a "significant" short position. The Legislation also would prohibit naked short selling of the shares of any issuer that is admitted to trading on a European market and where the principal venue for trading such shares is in the European Union. Under the Legislation there are limited exemptions to the new regulations available, in particular (i) for shares of issuers admitted to trading on an EU market where the principal venue for trading of such issuer's shares is on a non-EU market, and (ii) for market makers who apply to the Commission for an exemption in their role as a market maker.
National regulators would retain all enforcement powers under the Legislation, including the right to take enforcement action and to request further information. Regulators also will have the power to introduce a circuit breaker whereby they can prohibit for 24 hours the short sale of a share that has suffered a 10% decline in value in a single trading day or otherwise to temporarily prohibit or impose conditions on short selling of shares or bonds of European issuers or the sovereign debt of EU member states.
The Legislation is now at the European Parliament and the Council of Ministers for final negotiation and adoption. If adopted, it will come into effect starting July 1, 2012.
In addition to the Legislation, the proposed European Directive on Alternative Investment Fund Managers (the "AIFM Directive") also contains short-selling provisions which may impose additional disclosure requirements or limitations.