On August 11, 2011, the Belgian financial regulator, the Financial Services and Markets Authority (FSMA) has amended the rules governing short selling of shares issued by certain financial institutions listed on Euronext Brussels and in related derivatives. The decision to introduce such modification was taken after consultation with the other members of the European Securities and Markets Authority (ESMA) and was driven by the high level of volatility that financial markets are currently seeing.
The Belgian short selling measures, as introduced on September 19, 2008 by the (at that time) Commissie voor het Bank, Financie en Assurantiewezen/Commission bancaire, financière et des assurances (now the FSMA) and confirmed by the Royal Decree of September 23, 2008 and as amended by the FSMA on August 11, 2011, now consist of the following three rules:
- Prohibition of “uncovered transactions” in shares issued by certain financial institutions listed on Euronext Brussels and in related derivatives. Coverage of shares through derivatives is also prohibited. Such measures apply to stock of, and derivative instruments (including futures) related to, the following financial institutions: Dexia SA, Ageas NV/SA, KBC Groep NV, and KBC Ancora Comm. VA;
- Disclosure of net short positions representing an economic interest in excess of 0.25 per cent of the capital of one of the financial institutions to the FSMA and the market. "Net economic short position" means any instrument (contracts for differences, spread bets, options, equities, etc.) giving rise to an exposure, whether direct or indirect, in the equity share capital of a company; and
- A requirement for qualified intermediaries to take reasonable measures to ascertain that their clients have appropriate coverage for their proposed transactions. "Appropriate coverage" means that the coverage must consist of the securities that have been sold, or of the securities to which the transaction in derivatives relates. Again, coverage through derivatives is not considered adequate.
The FSMA has now decided to extend the notion “uncovered transaction” so that coverage with borrowed securities is not considered to give rise to an appropriate “full coverage”. Therefore, "covered shorting” is now prohibited, in addition to "naked shorting" (that was prohibited already).
In practice, as from today, it is prohibited to take a “net economic short position” (i.e. any instrument (contracts for differences, spread bets, options, equities, etc.) giving rise to an exposure, whether direct or indirect, in the equity share capital of a company) by any means whatsoever, or to extend such a position to the shares of one of the abovementioned financial institutions.
Existing net economic short positions do not fall within the scope of this ban, but they may not be increased. The existing disclosure obligations remain in force, including for existing net economic positions.
The new measures apply to all transactions in the abovementioned financial instruments, regardless of whether they were carried out on the stock exchange or off-exchange (over-the-counter market). The prohibitions on short selling also apply to intra-day positions.
The exemptions to the short selling restrictions provided for in the list of questions and answers published by the FSMA remain in force. As a result, the (amended) short selling restrictions will not apply to the following parties/transactions:
- Market makers on the derivatives market and liquidity providers on the cash market (as defined by the Rulebook of Euronext) and financial intermediaries (licensed banks and investment companies) that are usually active as market makers on OTC markets (cash or derivatives market) are exempt from the short sale prohibition;
- Block trade counterparties are also exempt: financial intermediaries (licensed banks and investment companies) may sell blocks to their clients without having the securities at hand. When a client wants to sell a block to his intermediary, however, the latter must ascertain that his client has appropriate coverage; and
- The measures described above do not apply to covered short selling. Art. 25, 2° of the Law of August 2, 2002 remains in force, however, making it illegal to execute transactions or issue orders to trade: a) which give, or are likely to give, false or misleading signals regarding the supply of, demand for or price of one or more financial instruments; or b) which secure, by a person, or persons acting in collaboration, the price of one or more financial instruments at an abnormal or artificial level, unless (in either a) or b) the person who entered into the transactions or issued the orders to trade establishes that his reasons for doing so are legitimate and that these transactions or orders to trade conform to the normal practices which apply on the market concerned and are recognised as such by the FSMA.