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?

It seeks to regulate certain aspects of short selling* and credit default swaps (CDS)* in the European Union.
It introduces:
- uniform transparency requirements for investment managers; and
- new powers for financial regulators in EU countries and for the European Securities and Markets Authority (ESMA) to use in exceptional circumstances* where there is a serious threat to financial stability.

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 selling* 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 an EU country 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;
- 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 16 March 2020, 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 valid for 3 months.
On 10 June 2020, Decision (EU) 2020/1123 — ESMA was adopted to extend the original decision by 3 months until 17 September 2020.
On 16 September 2020, a further decision was taken, extending the previous one until 18 December 2020.
On 16 December 2020, a further decision was taken. It applies as of 19th December and extends the previous decision for a period of three months until 19 March 2021.

FROM WHEN DOES THE REGULATION APPLY?

It has applied since 1 November 2012.

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 the financial markets can spill over into the real economy.

For more information, see:

Short selling (European Commission)
Short selling (ESMA)
ESMA renews its decision requiring net short position holders to report positions of 0.1% and above — press release (ESMA).

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 fallen, so it has to pay less than the price it obtained from the sale.

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

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 EU country concerned or in one or more other EU countries; 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.

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

European Securities and Markets Authority Decision (EU) 2020/525 of 16 March 2020 to require natural or legal persons who have net short positions to temporarily lower the notification thresholds of net short positions in relation to the issued shares capital of companies whose shares are admitted to trading on a regulated market above a certain threshold to notify the competent authorties in accordance with point (a) of Article 28(1) of Regulation (EU) No 236/2012 of the European Parliament and of the Council (OJ L 116, 15.4.2020, pp. 5-13)

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)

Commission Delegated Regulation (EU) No 918/2012 of 5 July 2012 supplementing Regulation (EU) No 236/2012 of the European Parliament and of the Council on short selling and certain aspects of credit default swaps with regard to definitions, the calculation of net short positions, covered sovereign credit default swaps, notification thresholds, liquidity thresholds for suspending restrictions, significant falls in the value of financial instruments and adverse events (OJ L 274, 9.10.2012, pp. 1-15)

See consolidated version.

Commission Delegated Regulation (EU) No 919/2012 of 5 July 2012 supplementing Regulation (EU) No 236/2012 of the European Parliament and of the Council on short selling and certain aspects of credit default swaps with regard to regulatory technical standards for the method of calculation of the fall in value for liquid shares and other financial instruments (OJ L 274, 9.10.2012, pp. 16-17)

Commission Implementing Regulation (EU) No 827/2012 of 29 June 2012 laying down implementing technical standards with regard to the means for public disclosure of net position in shares, the format of the information to be provided to the European Securities and Markets Authority 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 according to Regulation (EU) No 236/2012 of the European Parliament and of the Council on short selling and certain aspects of credit default swaps (OJ L 251, 18.9.2012, pp. 11-18)

Commission Delegated Regulation (EU) No 826/2012 of 29 June 2012 supplementing Regulation (EU) No 236/2012 of the European Parliament and of the Council with regard to regulatory technical standards on notification and disclosure requirements with regard to net short positions, the details of the information to be provided to the European Securities and Markets Authority in relation to net short positions and the method for calculating turnover to determine exempted shares (OJ L 251, 18.9.2012, pp. 1-10)

last update 02.12.2020