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.