New EU Short Selling Proposals

On June 14, 2010, the EU Commission published a consultation paper setting out certain options for potential legislation in respect of short selling and requesting responses to those proposals by July 10, 2010 (the “Short Selling Consultation”).

The Short Selling Consultation contemplates the following key restrictions on short selling:

• prohibition of naked short selling of the shares of any company admitted to trading on a European market (“European Company”);
• private disclosure to regulator of net short positions of 0.2 % or more in the shares (and, potentially, listed debt securities) of a European Company;
• public disclosure to market of net short positions of 0.5 % or more in the shares (and, potentially, listed debt securities) of a European Company; and
• private disclosure to regulator of “significant” short positions in the sovereign debt of EU member states. For this purpose, “significant” would be defined by the Commission individually for each member state, but would take into account the total amount of sovereign bonds issued by that member state and the average size of holding in those bonds.

The Short Selling Consultation also proposes that national regulators be empowered 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.

We anticipate that a short selling regulation (with direct effect on all EU market participants) reflecting the proposals made in the Short Selling Consultation will come into force in Q1 or Q2 of 2011.