Europe vs. The Short Sellers: European Parliament Approves Ban On Uncovered Short Selling And Sovereign Debt CDS

Author:Mr David Freedman
Profession:Baker & McKenzie LLP

Recent Developments

In response to the spreading European sovereign debt crisis and its effect on Eurozone sovereigns, financial institutions and the broader market, the European Parliament (EP) has just approved a wide-reaching Regulation1 that will substantially limit the ability of market participants to engage in short selling and credit default swap (CDS) trading in European listed shares and sovereign debt upon its entry into effect throughout the European Economic Area (EEA) on November 1, 2012. Certain Eurozone countries, not wanting to wait another year, have already implemented their own short selling restrictions, which generally are in line with but in certain areas go further than the Regulation.

Implications for Financial Industry Professionals

Reinforcement of control over the European equity and sovereign debt markets. New reporting obligations for net short positions in EU listed equity securities and sovereign debt. Near-total ban on CDS on sovereign debt, absent a correlated long position. Full extra-territorial effect, covering trading both inside and outside the EEA. "Short selling restrictions already in place in Belgium, France, Greece, Italy and Spain. What the Regulation Says

The key operative sections of the Regulation cover listed shares as well as sovereign debt and CDS on sovereign debt, both for reporting and substantive trading restrictions.

Reporting Requirements

The Regulation establishes a two-tiered disclosure system for net short positions in the issued share capital of a company that has its shares admitted to trading on a regulated market of the EEA or an EEA multilateral trading facility and for whom the principal trading market is in the EEA.

Short sellers must first notify to the competent authority of the most relevant market in terms of liquidity for a security whenever their net short position at the end of a trading day reaches 0.2% of the issued share capital of the company, and at each movement of 0.1% above that. The short seller must also disclose to the public net short positions of 0.5% and each 0.1% above that. The notifications must identify the short seller, and downward threshold crossings also must be notified.

Short sellers must also notify significant positions in sovereign debt and CDS relating to sovereign debt to the regulators, to assist them in monitoring whether such positions are creating disorderly markets or systemic risks or are being used for abusive purposes. However...

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