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Short selling of securities

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Short selling of securities

 

SUMMARY OF:

Regulation (EU) No 236/2012 on short selling and certain aspects of credit default swaps

WHAT IS THE AIM OF THIS REGULATION?

It seeks to regulate certain aspects of short selling* and credit default swaps (CDS)* in the European Union (EU).

KEY POINTS

In times of financial instability, certain financial transactions such as short selling, ‘naked short selling’* and credit default swaps bear the risk of aggravating any downward spiral in the prices of shares, especially in banks, threatening their viability and creating risks to the whole banking system.

Such instability in the financial markets can spill over into the real economy.

The regulation lays down strict rules on short selling and certain aspects of credit default swaps, in proportion to the risks associated with them, including:

  • measures to prevent ‘naked’ short selling of shares and loans issued by governments (called ‘sovereign debt’);
  • a ban on ‘naked’ CDS transactions (including on sovereign debt).

Disclosure requirements – financial institutions have to disclose certain short selling transactions to the banking authorities. Larger ones – above a certain threshold - must be publicly disclosed to the markets.

In periods of exceptional financial instability, the competent authorities in any EU country can temporarily restrict short selling if the price of the securities in question is falling significantly.

A proposed suspension has to be notified to other national authorities and to the European Securities and Markets Authority that must then issue an opinion on it.

FROM WHEN DOES THE REGULATION APPLY?

It has applied since 1 November 2012.

* KEY TERMS

Short selling: a transaction in which a financial institution sells a financial product it has borrowed, with the aim of buying it back later. The institution hopes that in the meantime the price of the product will have declined, so it has to pay less than the price it obtained from the sale.

Credit default swaps (CDS): highly risky, unregulated derivatives.

Naked short selling: perceived as riskier than normal short selling – when the seller has not even borrowed the financial product in the first place.

MAIN DOCUMENT

Regulation (EU) No 236/2012 of the European Parliament and of the Council of 14 March 2012 on short selling and certain aspects of credit default swaps (OJ L 86, 24.3.2012, pp. 1–24)

Successive amendments to Regulation (EU) No 236/2012 have been incorporated in the original text. This consolidated version is of documentary value only.

RELATED DOCUMENTS

Regulation (EU) 2016/1033 of the European Parliament and of the Council of 23 June 2016 amending Regulation (EU) No 600/2014 on markets in financial instruments, Regulation (EU) No 596/2014 on market abuse and Regulation (EU) No 909/2014 on improving securities settlement in the European Union and on central securities depositories (OJ L 175, 30.6.2016, pp. 1–7)

last update 04.11.2016

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