The European Commission has adopted regulations aimed at reducing the risk of settlement failures linked to naked short selling, as well as the means by which market participants should disclose significant short positions to the market. The technical standards being adopted are based on the work of the European Securities and Markets Authority (ESMA). They notably specify the details of the locate rule, which ensures that short sales do not result in a failure to deliver. The new rules also detail how ESMA is to determine the shares which are exempt from the Short Selling Regulation by virtue of their principal trading venue being outside the EU.
Taken together with the Short Selling Regulation that they implement, the regulations will create a more transparent, orderly and stable market by reducing the risks tied to short selling. Internal Market and Services Commissioner Michel Barnier said that the regulations give public authorities and market participants legal certainty on the detailed requirements which short sellers must comply with to adequately ensure the settlement of shares or sovereign debt when this is due. The technical requirements on how to disclose significant short positions are also set out so that market participants can prepare to apply the Short Selling Regulation as of November 1, 2012.
Under the regulations, information on significant net short positions must be disclosed on a central website operated or supervised by the relevant authority in a specified format, which allows the public to search the information by share issuer and to see historical data. They also spell out the requirements for agreements to borrow, such as options, repurchase agreements, or standing agreements, that ensure settlement of shares can be effected when due.
There are also requirements for arrangements and measures to ensure settlement in due time of short sales of shares. For standard locate arrangements, this would include two confirmations by a third party: first, that the party can make the shares available, and second, that it has at least put the requested number of shares on hold prior to the short sale. Specific arrangements are also set out for intra-day short selling and for shares which are easy to borrow or purchase.
The regulations also detail arrangements with third parties relating to short sales of sovereign debt to ensure a reasonable expectation that settlement of the sovereign debt can be effected when due. They provide the types of third parties, including investment firms and central counterparties, and the requirements they must satisfy in order to be eligible to enter into arrangements with short sellers to ensure settlement.
The Implementing Regulation is part of a package of four implementing measures that the Commission will adopt to specify technical aspects of the Short Selling Regulation. A Delegated Regulation on regulatory technical standards was also adopted by the Commission at the same time, based on draft regulatory technical standards submitted by ESMA. This sets out the details of the information on short positions that must be notified to competent authorities and disclosed to the public. It also specifies what information competent authorities must report on a quarterly basis to ESMA, and the method of calculation of turnover for ESMA to determine the principal trading venue of shares.
The Implementing Regulation will enter into force on the day following its publication in the Official Journal of the European Union and will apply from November 1, 2012, except for the provisions on the principal trading venue, which shall apply from the date of entry into force.
The Delegated Regulation is subject to a one-month objection period by the European Parliament and the Council, which can be extended by one month, and will only enter into force, provided that neither co-legislator objects, at the end of this period and the day following publication in the Official Journal.
In order to fully implement the Short Selling Regulation, two final measures, a Regulatory Technical Standard and a Delegated Act, are expected to be adopted shortly.