Short Selling: Entry Into Force Of New EU Regulation On 1 November 2012

In September 2008, at the height of the financial crisis, the Member States of the European Union (as well as some third countries like the United States and Japan) saw a risk of collapse in share prices in short selling practices, particularly within the financial institutions, which could cause systemic risks.

In Luxembourg, the CSSF reacted by publishing two press releases in September 20081 prohibiting naked short sales where their underlying consisted of shares in a credit establishment or insurance undertaking traded on a regulated market of the Luxembourg Stock Exchange (excluding those securities admitted to trading on the Euro MTF).

Given the lack of cohesion within the Member States, the European Union responded by adopting Regulation (EU) No. 236/2012 of the European Parliament and of the Council of 14 March 2012 on short selling and certain aspects of credit default swaps (the "SSR")2. Although certain indirect provisions have applied since March 2012, the SSR took effect on 1 November 2012 and the positions adopted in 2008 by the CSSF are repealed as from this date.

As the European framework takes the legislative form of a regulation, this ensures that provisions directly imposing obligations on private parties to notify and disclose net short positions relating to certain instruments and restricting uncovered short selling are applied in a uniform manner throughout the European Union. Moreover, the SSR confers powers on the European Securities and Markets Authority ("ESMA")3 to coordinate measures taken by the competent authorities or to take measures itself.

The scope of the SSR is as broad as possible to provide for a preventive regulatory framework to be used in exceptional circumstances with a proportionate response to the risks that short selling of different instruments could represent. It is therefore only in the case of exceptional circumstances that competent authorities and ESMA will be entitled to take measures concerning all types of financial instruments (see the scope of the SSR under paragraph 2 below), going beyond the permanent measures that only apply to particular types of instruments (see the transparency regime under paragraph 3 below) where there are clearly identified risks that need to be addressed.

1. What is the definition of short selling in the SSR?

   The SSR provides a standard definition of short selling.

   According to Article 2.1.b) of the SSR, a "short sale" in relation to a share or debt instrument means any sale of the share or debt instrument which the seller does not own at the time of entering into the agreement to sell including such a sale where at the time of entering into the agreement to sell the seller has borrowed or agreed to borrow the share or debt instrument for delivery at settlement.

   The following transactions are not considered as short sales within the meaning of the SSR:

   a sale by either party under a repurchase agreement where one party has agreed to sell the other a security at a specified price with a commitment from the other party to sell the security back at a later date at another...