Regulation n° 236/2012 of the European Parliament and the Council of 14 March 2012 on short selling and certain aspects of credit default swaps (the “Short Selling Regulation”) was published in the Official Journal of the European Union on 24 March 2012. The Short Selling Regulation strengthens and harmonises the rules that apply to short positions in shares and in sovereign debt, and prohibits the purchase of uncovered sovereign CDS. It will apply as from 1st November 20121.
A “short position” is a position in one or more financial instruments where this position gives its holder a financial advantage if the price of a given security falls. Since February 2011 France has had transparency rules on short positions in shares that are traded on a French regulated market or on an organised multilateral trading facility.
The new European rules will replace the current transparency requirements, but without substantially modifying them as regards shares admitted to trading on a French regulated market or on an organised multilateral trading facility. For example, the thresholds for notification and public disclosure of short positions, as defined by the provisions of the AMF General Regulation, will remain unchanged. What is new for investors is the extension of these transparency obligations to short positions in all shares admitted to trading on European markets, as well as in the sovereign debt issued by Member States of the European Union.
The Short Selling Regulation will also regulate the speculative techniques linked to short selling. For example, the locate requirements for short-sold securities will be bolstered in order to prevent delivery failures. Similarly, the buy-in procedures for clearing houses will be harmonised and the timeframe will be shortened. However, the Regulation provides for exemptions to the transparency and locate rules for persons who conduct market making activities.
The purchase of sovereign CDS - derivatives which allow buyers to cover themselves against the risk of the issuer defaulting - will be prohibited unless the purpose is to hedge a correlated exposure.
Lastly, the Short Selling Regulation will set forth the conditions under which the competent authorities may take emergency measures when the market conditions so justify, and will empower ESMA in its mission to coordinate and monitor enforcement of the European rules.
In order to facilitate the application of this new Regulation, the AMF is publishing a document which details the key support measures implemented by the AMF as well as the technical arrangements for implementation.
1Bearing in mind the technical nature of certain provisions of the Short Selling Regulation, it is accompanied by four implementing regulations.