On 15 September the EU Commission published a proposed directive on short selling and certain aspects of Credit Default Swaps (“CDS”) (the “Proposed Short Selling Directive”). At the same time, the EU Commission also published a proposed directive regulating OTCs, central counterparties and trade repositories.

Both directives now pass to the European Parliament and the EU Council for negotiation and adoption, with it being proposed that the Proposed Short Selling Directive be implemented by July 2012 and the directive on OTCs by the end of 2012.

The intention of the Proposed Short Selling Directive is to harmonise requirements relating to short selling across the European Union, harmonise the powers that regulators may use in exceptional situations where there is a serious threat to financial stability or market confidence and ensure greater co-ordination and consistency between Member States in such situations. The Proposed Short Selling Directive will allow regulators the power to restrict short selling entirely, in moments of emergency.

Short selling can be divided into two types: covered short selling, (typically where the seller has borrowed the security, or made arrangements to ensure they can be borrowed before the short sale) and uncovered or naked short selling (where at the time of the short sale the seller has not borrowed the securities or ensured they can be borrowed). The Proposed Short Selling Directive includes a prohibition on naked short selling of the shares of any company which are admitted to trading on a European market and where the principal venue for the trading of the shares is located in the EU.

The Proposed Short Selling Directive also aims to create a European harmonised network for the disclosure of short positions and further to this it includes a requirement for short orders to be identified as such when made. The Proposed Short Selling Directive provides that any short positions of 0.2% (and all 0.1% increments above that level) will be disclosable to the relevant national regulators. Short positions of 0.5% (and all 0.1% increments above that level) will be disclosable to the public. Restrictions will also apply to holdings of sovereign bonds and uncovered sovereign CDS of Member States.