On 15 September 2010, the Commission published its proposals in respect of stand-alone legislation intended to address the risks associated with short selling and certain aspects of credit default swaps ("CDS") in the European Union (the "Proposed Regulation").1
The recent period of financial instability, and in particular the focus on the creditworthiness of various financial institutions, and even certain Eurozone countries, has cast a spotlight on the roles played by short selling and CDS within the financial system. Some regulators have even blamed some of the recent financial system instability on the use of those instruments. This has led to the introduction in various jurisdictions of ad-hoc measures banning or imposing conditions on the use of those instruments in certain circumstances.
In an effort to try and coordinate the approach of the EU member states to these instruments (and prevent responses at the national level being circumvented by the exploitation of cross-border differences in policy), the European Commission (the "Commission") and the Committee of European Securities Regulators ("CESR") have focused on how to reduce the potential risks associated with short selling and CDS. In March 2010, CESR issued a report and feedback statement setting out its proposals for a pan-European model for the disclosure of short positions in EU shares and technical details in respect thereof (the "CESR Model").2 The contents of the CESR Model are outlined in our updates of 9 March 20103 and 2 June 2010.4 Also in June 2010, the Commission published a consultation to aid the finalisation of proposals on stand-alone legislation dealing with short selling (the "Consultation"). Details of the Consultation can be found in our update of 14 June 2010.5
The Proposed Regulation is the next evolutionary step in the process and focuses on two main areas. The first area of focus is the short selling of a company's shares or debt instruments issued by an EEA Member State or the European Union, as well as transactions referencing such instruments under which a person obtains a financial benefit from a fall in value of such an instrument. The second area of focus is the buying of credit protection, through CDS and similar instruments, on the debt instruments issued by EEA member states and the European Union bodies. The person obtaining such a financial benefit from a short sale or buying credit protection on a debt instrument is referred to in the Proposed Regulation as having a "short position" in the relevant instrument, and "shorting" when used herein means the obtaining of a short position (which potentially encompasses not only short selling, but also derivatives and other instruments having the same economic effect, and not only CDS but also other activities such as the issuance of credit-linked notes).
The Proposed Regulation aims to achieve each of the following when...