In the context of the financial crisis, the French financial market regulator (the Autorité des Marchés Financiers, "AMF") issued emergency measures regulating short selling on 22 September 2008. In summary those measures imposed a ban on naked short selling regarding the securities of a list of 15 financial institutions and an obligation on operators to disclose to the AMF any net short position exceeding 0,25% of the share capital of these companies. The measures were initially put into place for a three month period and were subsequently renewed by the AMF on several occasions.
The transitional regime expired on 1 February when the permanent net short position disclosure regime came into force.
The first piece of the permanent regime was enacted by the law "for banking and financial regulation" (loi de regulation bancaire et financière) dated 22 October 2010. This law introduced a new article L. 211-17-1, I into the French Monetary and Financial Code, which expressly prohibits the practice of naked short selling in any securities listed on a regulated market (subject to the same sanctions as that the AMF can impose on offenders guilty of market abuse). In addition the law reduced the time period between the sale and purchase order and the delivery and transfer of property of listed securities in order, inter alia, to restrain the opportunities for short selling speculation. Currently the delivery and transfer of property of listed securities takes place three trading days after the sale and purchase order. This time period will be reduced to two trading days. However the effectiveness of this provision is currently suspended and will only come into effect on implementation of an equivalent European regulation.
The CESR report on technical details of the pan-European short selling disclosure regime (May 2010 CESR/10-453) provided that the CESR members who already had the powers to introduce a permanent disclosure regime should being the process of implementing it without waiting for the European Regulation to be issued. This is what has been done in France.
The net short position disclosure regime, compliant with the CESR pan-European framework, was introduced by a decree dated 28 October 2010. The decree amended the AMF general regulations by including a new article 223-37 which sets out the basic principles of the new disclosure regime. An AMF Instruction dated 9 November 2010 (English version available at: http://www.amf-france.org/affiche.asp?id=9738) (the "Instruction") supplements the article and sets out, in particular, the scope of the regime, the method of calculation of the net short positions, the persons responsible for the declaration and the scope of the market maker exemption.
Set out hereunder are a few of the main aspects of the new net short position disclosure regime.
The disclosure obligation is applicable to short positions held in the capital of an issuer
- where the issuer is listed on Euronext or Alternext,
- where the issuer's primary market is in France,
- where the issuer is not included on a "negative list" published on 26 January by the AMF (to be updated from time to time).
Although the Instruction appeared to suggest that the disclosure regime would only apply in respect of companies included on a list (which would not have been compliant with the CESR framework), the list in question proved to be a list of the companies which are out of scope of the disclosure regime. Currently 54 Euronext and Alternext listed companies are out of scope.
The Instruction (following the CESR framework) makes it clear that in addition to futures, equity swaps and CFDs, all positions in baskets such as indices and ETFs must be included in the calculation of net short positions in the capital of an issuer. Convertible bonds and instruments giving right to shares not yet issued should not be taken into account.
Article 223-37 of the AMF general regulations requires any person or entity holding a net short position representing 0.2%, 0.3%, 0.4%, 0.5% (or every further tranche of 0.1%) of the share capital of in scope issuers, to declare its position to the AMF the trading day (3.30 pm CET at the latest) following the date of the threshold crossing (T+1). This declaration obligation applies whether the threshold is crossed upward or downward.
The thresholds are to be calculated using the number of shares composing the issued share capital of the issuer as the denominator and the net economic short position calculated by applying a delta to each financial instrument held by the declaring operator (as further detailed in the Instruction).
The AMF will publish all declarations of short positions representing more than 0.5% of the share capital of relevant issuer on its website.
The net short position threshold crossing declaration must be sent by email to the following address: email@example.com. The AMF has published both a French and English version of the declaration form which are available on its web site.
Persons responsible for filing
The Instruction sets out the rules for the determination of the persons responsible for filing. The overarching principle is the net short position must be calculated (i.e. aggregated and netted against long positions) and declared at the level of the decision maker responsible for the position. In general this will take place at the level of the legal entity or person holding the position.
However where, within the same legal person, distinct investment strategies are pursued by distinct trading desks (in principle separated by appropriate Chinese walls), the net short position will need to be calculated and declared by each distinct trading desk.
Conversely, in a group of companies, whereas the basic rule would be that each company calculates and declares its net short position separately, the positions of the different entities will need to be aggregated, netted and declared by the parent company when the parent company dictates a common investment strategy to its subsidiaries (or they agree on a concerned investment strategy).
Accordingly, where a management company manages funds carrying out separate investment strategies the net short position will need to be calculated and declared for each fund (whereas where the funds carry out a common investment strategy the net short positions of all of these funds will be aggregated, netted against their long positions and declared by the management company).
Market maker exemption
As contemplated by the CESR framework, the Instruction provides that market makers are exempted from the obligation to make net short position declarations. However this is not an automatic exemption. In order to benefit from the exemption, any person meeting the criteria must first file a request (as included in annex 2 of the Instruction) and that request must be accepted by the AMF.
First net short position disclosure filings due 2 February
The new net short position disclosure regime came into force on 1 February. An AMF press release dated 26 January 2011 confirms that operators holding net short positions above the given thresholds as of 1 February are required to file their first net short position e-declaration by 15h30 on 2 February.
As the AMF press release of 9 November 2010 confirms, the French regime is designed to be the permanent regime applicable in France, and anticipates the regime which the future European Regulation (due to come into force 1 July 2012) will require. The French net short position disclosure regime is an application of the CESR pan-European framework, so the May 2010 reports of the CESR can be used in construing the provisions applicable in France.