Originally published 20 March 2020, updated 20 April 2020

The EU Short Selling Regulation (Regulation (EU) no. 236/2012) (the SSR) has, since 1 November 2012, regulated short selling and sovereign credit default swaps (CDS) in the EU.
The SSR imposes (i) a net short position reporting requirement for shares and sovereign debt, (ii) a prohibition on uncovered short sales of shares and sovereign debt and (iii) a prohibition on uncovered sovereign CDS.

The SSR also contemplates that in “exceptional circumstances”, EU Member State regulators as well as the European Securities and Markets Authority (ESMA) may impose additional restrictions or outright bans.

ESMA Decision on reducing the reporting threshold

On 16 March 2020, ESMA issued a Decision under which the reporting threshold for net short positions in shares has been reduced from 0.2% to 0.1% (the ESMA Decision). The reduced reporting threshold applies for a period of three months, until 16 June 2020. For further detail on the ESMA Decision, please see this Sidley Update.

EU Member State bans on short positions

On 17 and 18 March 2020, the national regulators of Austria, Belgium, France, Greece, Italy and Spain announced bans on short positions (the National Bans) in relation to shares traded on their national exchanges (referred to in this Update as “restricted shares”).

With the exception of Italy, for which the ban is expected to run until 18 June 2020, each of the National Bans was due to expire in mid-April 2020. However, on 15 April, the national regulators of Austria, Belgium, France, Greece and Spain announced an extension to each of their respective National Bans until 18 May 2020, with some minor adjustments as regards the scope thereof.

The National Bans prohibit creating or increasing net short positions in the restricted shares (not just a short sale in the shares themselves);[¹]  a short position includes a position resulting from “entering into a transaction which creates or relates to a financial instrument … where the effect or one of the effects of the transaction is to confer a financial advantage on the natural or legal person entering into that transaction in the event of a decrease in the price or value of the share or debt instrument.”

As a result, short exposures to the restricted shares through other financial instruments including futures, options, swaps and other derivatives, index-related instruments, baskets of financial instruments, shares/units of exchange-traded funds (ETFs) as well as American depositary receipts (ADRs) and global depository receipts (GDRs) are included when determining whether a net short position has been created or increased in breach of the National Bans.

Click here for an overview of the National Bans in their renewed form. It is worth noting that some of the recent adjustments address previous points of criticism. For example, the exemption for index- and basket-related instruments have now been aligned so that (with the exception of Italy) the National Bans are based on a single harmonised threshold.[²]  

Remaining inconsistencies

Despite these efforts, the picture is still not fully consistent. The National Bans continue to raise a number of interesting issues for market participants to consider, including the ability to hedge a long position in a share by shorting an index, particularly where the index is traded in an EU Member State that has not imposed a ban at national level (e.g., certain popular indices are admitted to trading in Germany) and the ability to roll long and/or short positions that were entered into prior to the National Bans. It is therefore important that market participants review each National Ban on its own terms.

Limited availability of the market-making exemption

Each of the National Bans provides for an exemption for market-making activities under Article 2(1)(k) of the SSR. However, this exemption is effectively available only for EU market makers who have notified their respective EU Member State regulators of their intention to use the exemption.[³] Implications for U.S. transactions

While the U.S. Securities and Exchange Commission (SEC) has not to date instituted its own short sale ban, the EU Member State regulators interpret their respective National Bans as applying to short positions in the restricted shares through ADRs/GDRs as well as certain indices, baskets and ETFs. The National Bans have also been expressed as applying to any natural or legal person, irrespective of country of residence and regardless of whether trading occurs in an EU or non-EU country. Note that the SEC can conduct investigations to aid non-U.S. regulators concerning potential violations of non-U.S. law.

Conclusion

The situation regarding bans on short positions remains fluid; this Update will be amended as and when significant changes occur.

1. Austria’s ban, in its original form (i.e., for the period 18 March to 15 April 2020), was expressed to prohibit “short selling” or otherwise creating or increasing a short position in the restricted shares. When Austria’s ban was extended, however, it fell in line with the bans in the other five EU Member States, and since the effectiveness of the renewal of Austria’s ban (i.e., as of 16 April 2020) it is clear that Austria’s ban prohibits only the creation or increase of “net” short positions.
2. Both the Belgian and Greek regulators have decided to broaden the exemption for index- and basket-related instruments by increasing the relevant threshold from 20% to 50%. While the Belgian renewal measure is already in effect, the Greek renewal measure will become effective on 25 April 2020.
3. A list of market makers and authorized primary dealers using the exemption under the SSR is available here.

Photo by Hamish Duncan on Unsplash