Porsche's covert (until last Sunday) acquisition of cashsettled options on VW shares should prompt a review of the regulatory regime that allowed it rather than further criticism of hedge funds and other short sellers.

National regulatory divergence

Like other countries, Germany has recently introduced a short selling ban - but (unlike in some other jurisdictions) it relates only to financial stocks and would not have prevented short-selling in VW. Even within Europe, we are seeing significant divergence of regulatory approach, both in the scope and nature of short selling bans and in disclosure rules for long and short positions.

Limits of EU regulation

However, there are two other key issues in this VW case: market transparency and equal treatment of shareholders in a takeover. These issues have been largely addressed in the UK, although the FSA is currently moving to extend these rules.

Unfortunately, neither the Takeover Directive nor the Transparency Directive requires CFDs or cash-settled options to be taken into account where there is no formal arrangement to vote or purchase the underlying shares. In the UK the Takeover Panel has addressed this gap, in the context of the trigger for a mandatory offer at 30% of a company's voting rights, and in defining what interests and dealings must be disclosed during an offer period. The FSA is in the final phase of introducing a regime for extending to cash-settled instruments the regime for disclosing interests in public companies - this will address stakebuilding up to and beyond the 30% trigger.

The Takeover Directive, finally adopted in 1994 after years of resistance in Germany and elsewhere, requires as a principle EU member states to provide equivalent treatment for all ordinary shareholders and protection of minorities - this seems to be an issue in the VW case.

BaFin, the German regulator, is said to be analysing dealings in VW shares. The Market Abuse Directive provides a basis to prosecute not only insider dealing but also any manipulative dealings in listed shares or related instruments.