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Summaries of EU Legislation

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 THE REGULATION?

  • Regulation (EU) No 236/2012 seeks to regulate certain aspects of short selling1 and credit default swaps (CDS)2 in the European Union (EU).
  • It introduces:

KEY POINTS

The regulation:

  • covers all types of financial instruments, in particular shares listed in the EU, derivatives and sovereign debt securities (loans issued by governments);
  • lays down strict rules on short selling and certain aspects of CDS in proportion to the risks associated with them, including:
    • measures to prevent ‘naked’ short selling4 of shares and loans issued by governments,
    • a ban on ‘naked’ CDS transactions (including on sovereign debt);
  • sets disclosure requirements – investment managers have to disclose certain short-selling transactions to the competent authorities, whereas larger transactions, above a certain threshold, must be publicly disclosed to the markets;
  • gives, in periods of exceptional financial instability in a Member State or in the EU as a whole, the competent authorities temporary powers to require greater transparency or to impose restrictions on short-selling and CDS transactions;
  • gives ESMA:
    • a key coordination role to ensure consistency between national competent authorities and to ensure that any measures taken are necessary and proportionate,
    • the power to take measures where the situation has cross-border implications.

Implementing and delegated acts

  • Implementing Regulation (EU) No 827/2012 lays down technical standards regarding:
    • the means for public disclosure of net position in shares;
    • the format of the information to be provided to ESMA in relation to net short positions;
    • the types of agreements, arrangements and measures to adequately ensure that shares or sovereign debt instruments are available for settlement; and
    • the dates and period for the determination of the principal venue for a share.
  • Delegated Regulation (EU) No 826/2012 supplements Regulation (EU) No 236/2012 regarding:
    • technical standards on notification and disclosure requirements with regard to net short positions;
    • the details of the information to be provided to ESMA in relation to net short positions; and
    • the method for calculating turnover to determine exempted shares.
  • Delegated Regulation (EU) No 918/2012 supplements Regulation (EU) No 236/2012 regarding:
    • definitions; and
    • calculating net short positions, covered sovereign CDS, notification thresholds, liquidity thresholds for suspending restrictions, significant falls in the value of financial instruments and adverse events.
  • Delegated Regulation (EU) No 919/2012 supplements Regulation (EU) No 236/2012 regarding technical standards for calculating the fall in value for liquid shares and other financial instruments.

COVID-19 pandemic – ESMA decisions

  • On , following the outbreak of the COVID-19 pandemic and given the resulting serious threat to market confidence in the EU, ESMA issued a decision (Decision (EU) 2020/525 – ESMA) temporarily requiring the holders of net short positions in shares traded on an EU-regulated market to notify the relevant national competent authority if the position reaches or exceeds 0.1% of the issued share capital after the entry into force of the decision. This decision was extended on several occasions and finally expired on .

FROM WHEN DOES THE REGULATION APPLY?

It has applied since .

BACKGROUND

In times of financial instability, certain financial transactions such as short selling and CDS bear the risk of aggravating any downward spiral in the prices of shares, especially in financial institutions, threatening their viability and creating risks to the whole financial system. Such instability in financial markets can spill over into the real economy.

For further information, see:

KEY TERMS

  1. 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 fallen, so it has to pay less than the price it obtained from the sale.
  2. Credit default swaps (CDS). Highly risky, unregulated derivatives.
  3. Exceptional circumstances. In the context of this regulation, there are adverse events or developments that constitute a serious threat to financial stability or to market confidence in the Member State concerned or in one or more other Member States; and the measure is necessary to address the threat and it will not have a detrimental effect on the efficiency of financial markets, which is disproportionate to its benefits.
  4. Naked short selling. A transaction perceived as riskier than normal short selling, since 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 on short selling and certain aspects of credit default swaps (OJ L 86, , pp. 1–24).

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

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