The Council of the European Union has recently adopted a Regulation to act as a common regulatory framework on short selling and certain aspects of credit default swaps which should be applicable as from 1st November 2012. This Regulation aims to harmonise the rules for short selling and certain aspects of credit default swaps in order to prevent the creation of obstacles to the proper functioning of the internal market and ensure that high levels of consumer and investor protection are maintained. The Regulation as stated in its Preamble seeks to address the identified risks without unduly detracting from the benefits of short selling which plays an important role in ensuring the proper functioning of financial markets, in particular in the context of market liquidity and efficient price formation.
The Regulation defines short selling in relation to a share or debt instrument whereby the seller at the time of entering into the agreement to sell does not own the respective share or debt instrument but borrows or agrees to borrow the share or debt instrument for delivery at settlement. The definition specifically excludes repurchase agreements at a specified price, a transfer of securities relative to securities lending agreements and futures contracts or other derivative contracts at a specified price at a future date.
Credit default swaps are defined as derivative contracts in which one party pays a fee to another party in return for a payment or other benefit in the case of a credit event relating to a reference entity and of any other default, relating to that derivative contract, which has a similar economic effect.
The Regulation provides for greater transparency; it prescribes the notification to competent authorities when the net short position in relation to the issued share capital of a company that has shares admitted to trading on a trading venue reaches or falls below the stipulated notification thresholds. The Regulation also requires notifications to competent authorities of significant net short positions in sovereign debt and the public disclosure of significant net short positions in shares which reach or fall below the relevant publication threshold.
The notification and disclosure requirements apply to natural or legal persons domiciled or established within the Union or in a third country. The Regulation also regulates the method of disclosure to be made.
The Commission has also requested ESMA to develop technical standards concerning this Regulation.
