The Regulation of the European Parliament and of the Council on short selling and certain aspects of credit default swaps (EU) No 236/2012 (Regulation) (supplemented by a European delegated regulation as well as regulatory and implementing standards) will apply from 1 November 2012. The text of the Regulation together with the relevant technical standards and delegated acts are available here. The Regulation has been implemented in Ireland by SI No 340 of 2012 (The European Union (Short Selling) Regulations 2012). Information in relation to the application of the Regulation (including Q&As mentioned below) is available on the ESMA website.
The purpose of the Regulation is to increase transparency of short positions held by investors in certain EU securities and sovereign debt, reduce settlement and other risks associated with short selling and create a harmonised EU framework to address the potential risks arising from short-selling and credit default swaps. The Regulation bans uncovered or naked short selling of sovereign CDS. Short selling is only permitted in certain circumstances. The Regulation imposes certain notification and public disclosure obligations on legal or natural persons who hold net short positions in shares or sovereign debt or who hold uncovered positions in sovereign credit default swaps. The Central Bank is the competent authority in Ireland for the purpose of the Regulations. Those notifying must register with the Central Bank prior to submitting their first notification required under Articles 5-8 of the Regulations. The ESMA Q&A is clear that the first notification or disclosure relates to all net short positions existing or having arisen on 1 November 2012.
Some of the detail of the implementation of this new framework is still evolving. It seems clear at this stage that the notification obligations fall on the person who is exercising control over the relevant assets (generally the investment manager). Furthermore, the notification must be made to the competent authority in the jurisdiction of domicile of the principal trading venue where the relevant transferable securities or sovereign debt is listed. ESMA has published a list identifying the relevant competent authority for each share admitted to trading on a European regulated market or multi-lateral trading facility and each sovereign issuer.
For investment funds, it is important to remember that UCITS may not carry out uncovered sales of transferable securities, money market instruments, units of CIS or FDI. For non-UCITS, the implementation of the Regulation will mean that certain types of short selling may only be carried out within permitted criteria, and that managers may need to make regulatory notifications and public disclosures in respect of investments and comply with the associated record retention obligations.
ESMA’s website provides for public access to certain information:
- Significant net short position notification thresholds for each sovereign issuer (Article 7(2));
- Links to central websites operated or supervised by competent authorities where the public disclosure of net short positions is posted (Article 9(4));
- The list of shares for which the principal trading venue is located in the third country (Article 16(2));
- A list of market makers and authorised primary dealers (Article 17(3));
- A list of existing penalties and administrative measures applicable in Member States (Article 41).
ESMA published a Questions and Answers (Q&A) document that clarifies the technical aspects of practical implementation of the Regulation. ESMA invites market participants to submit questions regarding practical implementation of the Regulation to it. The document will be periodically updated to reflect new questions.
On 11 October 2012, ESMA published preliminary notification thresholds for short positions in sovereign debt under the Regulation. The Regulation requires firms to disclose short positions in relation to EU sovereign debt. These requirements will apply when the net short position reaches a certain percentage of the total amount of outstanding issued debt of the sovereign issuer, and again, at certain other thresholds. Notifications of net short positions must be made through the reporting mechanism designated by the relevant EU regulator (in Ireland, the Central Bank).
There is no requirement for public disclosure of sovereign debt positions. The reporting thresholds are monetary amounts fixed by applying the percentage thresholds to the outstanding sovereign debt of the sovereign issuer. They will be revised and updated quarterly to reflect the changes in the total amount of outstanding sovereign debt of each sovereign issuer. The amount of outstanding debt will be calculated using a duration adjusted approach.