On 15 September 2010 the European Commission issued a draft regulation on short selling and certain aspects of credit default swaps (CDS). The legislation is aimed at unifying a myriad of short sale rules across the European Union (EU).

The draft regulation would:

  • Require private disclosure of net short positions in shares to the relevant regulator if they exceed 0.2% of share capital, and every 0.1% thereafter up until 0.5%
  • Require public disclosure to the market if net short positions in shares exceed 0.5% of share capital, and every 0.1% thereafter
  • Require private disclosure of significant net short positions in sovereign debt and CDS related to sovereign debt
  • Require marking of all short sales of shares listed on a trading venue in the EU
  • Ban naked short selling of shares and sovereign debt, requiring investors to have arrangements in place to locate securities before a transaction is settled
  • Introduce mandatory buy-in procedures and fines for late settlement
  • Provide regulators within Member States and the newly formed ESMA with emergency powers

The Commission’s proposals now pass to the European Parliament and to the Council of the EU. It is anticipated that the regulation will apply from July 2012.

A client briefing is available which discusses the main aspects of the Commission’s draft regulation (http:// www.herbertsmith.com/NR/rdonlyres/4F6C9757-BE82- 492E-A692-D0AC6AD7D0D3/0/EuropeanCommission introducesdraftshortsellingregulation2010briefing.html). We also include a “to do list” for in-house counsel, as the regulation will require the investment of significant resources to ensure that reporting processes are in place in a timely fashion.