Short Selling

National Short Selling Rules

In the midst of the financial crisis, in the autumn of 2008, European regulators imposed a ban on short selling in financial shares. When talking about short selling restrictions, one has to consider all the national laws in Europe. ESMA started to provide an overview of the different national rules, here, and most of these restrictions are still in effect.

European wide Short Selling Regulation

None of the national approaches were co-ordinated and this created problems for pan-European trading. Overnight, brokers had to figure out whether a French stock traded in the UK by a German entity was covered by the French, British or German short selling regulation.

The confusion resolved somewhat when, on 14th March 2012, the European Union passed a regulation (No 236/2012) on short selling and certain aspects of credit default swaps.

In a nutshell, the regulation says:

  • Net short positions in shares equal to 0.2 % of the issued share capital of the company or more must be reported to competent authority (Art. 7-8)
  • Net short positions in shares equal to 0.5 % of the issued share capital of the company or more must be publicly disclosed (Art. 6)
  • Uncovered short sales are banned (Art. 12-15), except for stocks that are primarily traded outside the EU (Art. 16), market makers or primary market operations. (Art. 17)

Additionally, the European Commission adopted four packages of technical details on short selling.

1) Implementing regulation as of June 29th covers:

  • the means for public disclosure of net position in shares
  • the format of the information to be provided to ESMA in relation to net short positions
  • the types of agreements, arrangements and measures to adequately ensure that shares or sovereign debt instruments are available for settlement
  • the dates and period for the determination of the principle venue for a share

2) Delegated regulation as of June 29th covers:

  • notification and disclosure requirements with regard to net short positions
  • the details of the information to be provided to ESMA in relation to net short positions
  • the method for calculating turnover to determine exempted shares

3) Delegated regulation as of July 5th covers:

  • the calculation of net short positions
  • covered sovereign credit default swaps
  • notification thresholds
  • liquidity thresholds for suspending restrictions
  • significant falls in the value of financial instruments and adverse events

4) Delegated regulation as of June 29th covers:

  • the method of calculation of the fall in value for liquid shares and other financial instruments

The difference between delegated regulation and implementing regulation relates mainly to the right of objection by the European Parliament and the Council. They can object to any delegated regulation within a month (possibly extended by another month), while an implemented regulation cannot be objected to.

An overview of all related texts on short selling regulation can be found here. Additionally, ESMA published guidelines on the exemption for market making activities and primary market operations. The guidelines deal with notifications to be made in order to obtain market maker and primary dealer exemptions under Article 17 of the Short Selling Regulation. The exemptions will apply only to the transactions carried out in performance of market making activities and as authorised primary dealers.

Similarly, the FSA (now the FCA) in the UK published guidelines on the notification process for market making activities and primary market operations. The relevant forms can be found here.

Academic view on Short Selling

Theoretical and empirical studies by academics show, overwhelmingly, that short selling bans of any kind consistently hurt market efficiency and increase short-term volatility. In effect, a short selling ban in itself may cause the next asset price bubble.

For an overview on academic studies relating to short selling see Alessandro Baber and Marco Pagano (2012): Short-Selling Bans around the World: Evidence from the 2007 – 2009 Crisis, Journal of Finance, Forthcoming.

Last updated 10th June 2013

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