Ashurst London
September 2012
Briefing
New short selling rules in the UK
from 1 November 2012
On 1 November 2012, the UK's existing
short selling disclosure regime (as set out
in FINMAR 2) will be abolished when EU
Regulation 236/2012 on short selling (the
Short Selling Regulation) comes into force
in the UK and in the rest of the EU. This
briefing explains how the new rules for
shares will work, using some practical
examples (it does not cover those aspects
of the Regulation which deal with sovereign
debt and CDSs, for which see our client
briefing: Naked CDS: the ban and beyond
(March 2012)).
Key points from the Short Selling
Regulation:
•
•
•
•
•
It requires notification to the UK
Financial Services Authority (FSA) (or
other relevant EU MiFID competent
authority) where "net shorts" reach or
fall below 0.2 per cent of issued share
capital and each 0.1 per cent above that
(Private Disclosure).
It requires (in addition to Private
Disclosure) public notification at the 0.5
per cent level and each 0.1 per cent
above that (Public Disclosure).
It prohibits short sales of shares unless
the shares have been borrowed or are
the subject of an enforceable claim or
the subject of other specific
arrangements defined and prescribed in
the Regulation and related regulations.
It has direct effect in EU member states;
therefore the FSA proposes to delete the
current provisions from FINMAR 2 (see
CP 12/2) and there will be no equivalent
new provisions.
Notification must be made by 2
November of existing net short
positions even if already notified
under the UK's current regime.
The new regime
The existing UK rules only apply to companies
undertaking rights issues or certain financial
institutions whereas the new, wider, EU rules will
apply from 1 November to all companies whose shares
are admitted to trading on a regulated market or MTF
as defined in MiFID.
In relation to shares admitted to trading on a
regulated market or MTF, the public and private
disclosure rules cover net short positions on any
market as well as off-market short positions, including
derivatives, index related instruments, baskets and
spread bets. Helpfully, one of the draft implementing
regulations (see box 3) clarifies that shorts on
financial instruments that give rise to a claim to
unissued shares (e.g. nil paid rights, subunderwriting or placing (if the shares concerned are
not then issued)), warrants and convertibles are not
shorts for disclosure purposes. This is not the same as
the rules governing the disclosure of long positions in
Chapter 5 of the FSA's Disclosure and Transparency
Rules, which, for example, would capture a purchase
of nil paid rights.
The prohibition on shorting shares similarly covers
shorting shares on any market (as well as off-market)
but does not catch derivatives. The UK currently has
no short selling prohibitions, only disclosure rules.
There are new rules for disclosure by groups and by
portfolio and fund managers which are totally different
from the existing UK rules.
Key exemptions are for:
•
Shares whose principal trading venue is outside the
EU. ESMA will publish a list of these shares.
•
Market making activities – but notification must be
made to the FSA that the market maker intends to
use this exemption not less than 30 calendar
days before it first intends to use it. Those
who would like to use this exemption from 1
November will therefore need to submit their
AUSTRALIA BELGIUM CHINA FRANCE GERMANY HONG KONG SAR INDONESIA (ASSOCIATED OFFICE) ITALY JAPAN
PAPUA NEW GUINEA SINGAPORE SPAIN SWEDEN UNITED ARAB EMIRATES UNITED KINGDOM UNITED STATES OF AMERICA
notification by 1 October. The FSA has stated
A person other than the issuer holds convertible
that it is its intention to publish the UK procedure
bonds or subscription warrants representing five
for making such notifications, including the forms
per cent of the share capital and sells short five
that the FSA will require to be completed, shortly
per cent of the shares
after mid-September. This will leave little time for
Is this disclosable as a net short position?
a market maker to finalise its notification and
Yes, as the position in respect of the convertible bond
submit it to the FSA. ESMA has published guidance
or warrants is not a long position within Regulation
in its consultation paper on the market making
exemption (ESMA 2012/580).
3.2(b) against which the short sale could be netted
because of Article 7(b) as explained in Box 3, para 3
of ESMA's Final Report of 19 April 2012
•
Stabilisation within the UK rules.
Worked examples
(ESMA/2012/263) (ESMA Final Report) (see box 1
below).
Could this be a prohibited short sale?
We set out below some common situations which arise
The holding of convertible bonds or warrants will
in everyday practice together with our provisional
permit the short sale under Regulation 12.1(b) and
analysis of how they might be dealt with under Articles
Article 5.1(e) of the Implementing Regulation but
5 and 6 of the Short Selling Regulation (disclosure)
only if they can be unconditionally converted or
and under Article 12 of the Regulation (ban on short
subscribed in time for settlement under the short sale
selling). It should be noted that the analysis gives, in
(because of the requirement in Article 5.1(e) that one
a few cases, different outcomes from the current UK
must be entitled to receive the shares under the
legislation. In the examples below, "Regulation" refers
subscription rights on or before settlement of the short
sale).
to the Short Selling Regulation and "Article" refers to
the July Regulation (see box 1).
An investment bank which has underwritten (or
Issuer issues convertible debt or subscription
agreed to place) an issue of new shares lays off
warrants
some of its risk by entering into a sub-
Is this disclosable as a net short position?
underwriting (or sub-placing) agreement with a
No, it is not a net short position as it does not relate to
fund manager
the issued share capital (see Regulation 3.1(a)) and it
Is this disclosable as a net short position?
does not confer a financial advantage on the issuer in
No, it is not a net short position under Regulation
the event of a decrease in the price of the shares (see
3(1)(b) because Article 7(b) states that short positions
Regulation 3.1(b)). Article 7(b) also makes clear that
on financial instruments that give rise to a claim to
subscription rights shall not be considered as short
unissued shares are not net short positions (see box
3).
positions when calculating a net short position (see
box 3).
Could this be a prohibited short sale?
Could this be a prohibited short sale?
The sub-underwriting/placing is not a short sale and is
No. A short sale is defined in Regulations 2 and 12 as
therefore permitted because Regulation 12.1 only
"any sale of the share…" and "any sale of the share
prohibits a short sale "of a share admitted to trading
admitted to trading on a trading venue" respectively
and this is not a sale of the share.
on a trading venue" and these shares are not yet
issued.
A third party (not the issuer) sells convertible
Rights issues
debt or subscription warrants short
Consider three different scenarios: (1) the company
Is this disclosable as a net short position?
does a rights issue and issues its shareholders with
No, it is not a net short position under Regulation
rights to subscribe for new shares (2) a shareholder
3(1)(b) because Article 7(b) states that short positions
on financial instruments that give rise to a claim to
sells rights short (3) a third party sells the shares
short and buys rights.
unissued shares are not net short positions (see box
3).
Are these disclosable net short positions?
The analysis for disclosure purposes for each of the
Could this be a prohibited short sale?
scenarios above is the same as under the first three
No. A short sale is defined in Regulations 2 and 12 as
examples above (relating to subscription warrants),
"any sale of the share…" and "any sale of the share
replacing "subscription warrants" by "rights to
subscribe".
admitted to trading on a trading venue" respectively
and this is not a sale of the share.
Could these be prohibited short sales?
The analysis for each of the scenarios above is the
Article 7(b) (as interpreted in ESMA's Final Report).
See box 3.
same as under the first three examples above in
relation to subscription warrants.
Could this be a prohibited short sale?
A person sells short a basket (or index or ETF) of
commitment is conditional and therefore does not
shares, including shares in an issuer subject to
meet the test set out in Regulation 12.1(b) (see box
2).
Yes, as the underwriting/sub-underwriting/placing
the Short Selling Regulation
Is this disclosable as a net short position?
Yes, this is a net short position (to the extent to which
A person enters into an option, future or CFD
the underlying shares are represented in the basket,
under which it will obtain an economic
index or ETF), see Regulation 3.1(b) and Recital 10
advantage, if the price of shares in an issuer
which refers to "index-related instruments". It may
subject to the Short Selling Regulation were to
also be necessary to disclose a net short of the shares
in the ETF itself.
fall
Is this disclosable as a net short position?
Yes – see Regulation 3(1)(b).
Could these be prohibited short sales?
Yes, if the basket, index or ETF is itself in the form of
Could this be a prohibited short sale?
share capital admitted to trading in the EU but if the
This is not a "short sale of a share admitted to
basket, index or ETF is in some other form further
trading" within Regulation 12.1 and is therefore not
prohibited.
analysis would be required in relation to the structure
and the underlying shares.
However, the FSA has powers to prohibit short CFDs in
A person enters into a bet with a betting
exceptional circumstances and similarly the FSA has
company that the price of shares in an issuer will
powers where prices have fallen significantly to
fall
prohibit any short sales even where the shares have
been borrowed.
Is this disclosable as a net short position?
Yes, this is a net short position – see Regulation 3.1(b)
and Recital 10 to the Short Selling Regulation, which
refers to trading outside trading venues and spread
bets relating to shares.
Could this be a prohibited short sale?
No, this is not a short sale of a share admitted to
trading on a trading venue within Regulation 12.1 and
is therefore not prohibited.
An investment bank sells short five per cent of
shares of an issuer whose shares it has
underwritten/sub-underwritten/agreed to take
as a placee
Is this disclosable as a net short position?
Yes, this is a net short position, because the
underwriting/placing commitment does not count as a
long position under Regulation 3.2(b) because of
Please speak to one of the Ashurst contacts listed if
you require further information.
Box 1
Background legislation and documents
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.
Commission Delegated Regulation (EU) No. 826/2012 with regards to regulatory technical standards on
notification and disclosure requirements.
Commission Implementing Regulation (EU) No. 827/2012 covering the means for public disclosure of net
position in shares etc. (Implementing Regulation)
Commission Delegated Regulation (draft dated July 2012) covering the method to be used when calculating
percentage decreases in the value of shares.
Commission Delegated Regulation (draft dated July 2012) regarding definitions, calculation of net short
positions etc. (July Regulation).
ESMA final report of 20 April 2012 (ESMA/2012/263).
ESMA Questions and Answers: Implementation of the Regulation on Short Selling and certain aspects of
credit default swaps (ESMA/2012/572).
ESMA consultation paper on the exemption for market making activities (ESMA 2012/580).
Box 2
Useful extracts from the Short Selling Regulation
Regulation 3.1
For the purposes of this Regulation, a position resulting from either of the following shall be considered to be
a short position relating to issued share capital or issued sovereign debt:
(a)
a short sale of a share issued by a company or of a debt instrument issued by a sovereign issuer;
(b)
entering into a transaction which creates or relates to a financial instrument other than an instrument
referred to in point (a) where the effect or one of the effects of the transactions is to confer a financial
advantage in the event of a decrease in the price or value of the share or debt instrument.
Regulation 12.1
Restrictions on uncovered short sales in shares
1.
A natural or legal person may enter into a short sale of a share admitted to trading on a trading venue
only where one of the following conditions is fulfilled:
(a)
the natural or legal person has borrowed the share or has made alternative provisions resulting in a
similar legal effect;
(b)
the natural or legal person has entered into an agreement to borrow the share or has another absolutely
enforceable claim under contract or property law to be transferred ownership of a corresponding number of
securities of the same class so that settlement can be effected when it is due;
(c)
the natural or legal person has an arrangement with a third party under which that third party has
confirmed that the share has been located and has taken measures vis-à-vis third parties necessary for the
natural or legal person to have a reasonable expectation that settlement can be effected when it is due.
Box 3
Useful extracts from the draft Delegated Regulation
Article 7
The following criteria shall be taken into account for the purposes of net short positions referred to in Articles
5 and 6:
(a)
It is irrelevant whether a cash settlement or physical delivery of underlying assets has been agreed.
(b)
Short positions on financial instruments that give rise to a claim to unissued shares, and subscription
rights, convertible bonds and other comparable instruments shall not be considered as short positions when
calculating a net short position.
Key contacts
Jeffrey Sultoon
Jonathan Haines
Partner
Partner
London
London
T: +44 (0)20 7859 1717
T: +44 (0)20 7859 1396
E: jeffrey.sultoon@ashurst.com
E: jonathan.haines@ashurst.com
Nicholas Holmes
Richard Small
Partner
Counsel
London
London
T: +44 (0)20 7859 2058
T: +44 (0)20 7859 2187
E: nicholas.holmes@ashurst.com
E: richard.small@ashurst.com
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This publication is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
Readers should take legal advice before applying the information contained in this publication to specific issues or transactions. For more information
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© Ashurst LLP 2012 Ref:25967446 12 September 2012