On 24 March 2012, the final text of the European regulation on short selling and certain aspects of credit default swaps was published in the Official Journal of the European Community.
The final text of the new EU regulation on short selling and certain aspects of credit default swaps (the “Regulation”) does not materially deviate from that of the European Commission’s proposal. The Regulation provides for a harmonised European framework governing short selling of certain listed instruments. Among others, the Regulation:
(a) prohibits the use of ‘uncovered’ Credit Default Swaps (“CDs”) in sovereign debt, i.e. transactions where no underlying long position exists in the relevant sovereign bond, are no longer permitted (Member States are however allowed to suspend the prohibition in their own jurisdiction in certain circumstances);
(b) imposes certain ‘certainty of settlement’-requirements in relation to uncovered short selling of shares and sovereign bonds;
(c) introduces an harmonised notification and reporting regime for shares, whereby holders of net short positions must notify these privately to the regulator when they exceed 0.2% of the issued share capital of the issuer company and must publicly disclose these (on a named basis) when they exceed 0.5%. In each case, further notification or reporting is required at each 0.1% above the initial threshold;
(d) provides national competent authorities and ESMA with additional powers to intervene in the markets in times of stress; and
(e) excludes sales under a repo agreement or futures contracts from the definition of short sales in shares and debt instruments.
Many provisions of the Regulation are to be further implemented by means of delegated acts and technical standards. ESMA has been requested to advise the European Commission in that regard. That process is already at an advanced stage. The Regulation will enter into force on 1 November 2012 and will be directly applicable in the Member States.