EU Short Selling Regulation

Following on from the European Commission’s summer consultation on options for potential legislation in respect of short selling, on September 15, 2010, the Commission has published draft legislation for the pan-European regulation of short selling of European securities (the “Draft Short Selling Regulation”).

The Draft Short Selling Regulation broadly reflects the proposals made in the Short Selling Consultation. However, the Draft Short Selling Regulation provides for a number of additional measures and carve-outs that have been added during the consultation process, including a requirement that short orders be flagged as such on trading venues, powers for regulators to introduce a ‘circuit-breaker’ and carve-outs for market makers and in respect of shares whose primary market is outside the EU. The EU Commission intends that the Draft Short Selling Regulation shall come into force on July 1, 2012, following its formal adoption in 2011.

By way of summary, the Draft Short Selling Regulation contemplates the following key rules in respect of short selling:

• prohibition of naked short selling of the shares of any company which are admitted to trading on a European market and where the principal venue for the trading of the shares is located in the EU;
• requirement for short orders to be identified as such when made (and a requirement for trading venues to publish a daily summary of the volume of orders marked as short orders);
• private disclosure to regulator of net short positions in the shares of a European Traded Company which reach, exceed or fall below 0.2%;
• public disclosure to market of net short positions in the shares of a European Traded Company which reach, exceed or fall below 0.5%;
• private disclosure to regulator of short positions in the sovereign debt of EU member states or the EU itself which reach, exceed or fall below a “notification threshold” to be determined in respect of each member state by the Commission; and
• a ‘circuit breaker’ that will empower national regulators to prohibit for a period of 24 hours the short sale of a share that has suffered a 10% decline in value in a single trading day.

The Draft Short Selling Regulation will also empower the European Securities and Markets Authority (“ESMA”) and national regulators to temporarily prohibit or impose conditions on short selling of shares or bonds of European Companies or of the sovereign debt of EU member states in “emergency” circumstances.

The Draft Regulation will now go though the EU Co-Decision legislative procedure, during which the European Parliament and the Council will debate and finalise the precise terms before the Regulation coming into legal effect in 2012.