SHORT SELLING – THE NEW
EU REGIME
SHORT SELLING – THE NEW EU
REGIME
1 NOVEMBER 2012
London
A new short selling regime is in force across the
EU, including the UK, from 1 November 2012. The
regime is established by the directly applicable Short Selling Regulation. This briefing
summarises the basics of the new regime, focusing on its application to shares.
1. What is the new Regulation?
The Regulation (EU) of the European Parliament and of the Council on short selling and certain aspects of credit default swaps
No 236/2012 (the Regulation) is directly effective across the EU, including the UK, from 1 November 2012.
It applies to anyone who shorts equities or sovereign bonds, or who trades credit default swaps in relation to sovereign issuers,
or to any instruments that are the economic equivalent of shorting, for example indexes, baskets, futures, options, contracts for
differences and spread bets.
The rules relating to short selling of sovereign debt and sovereign credit default swaps are outside the scope of this briefing.
Articles 5 and 6 of the Regulation require the notification and disclosure of certain net short positions in shares, and Article 12
bans uncovered short sales of shares, in both cases in relation to shares admitted to trading on a regulated market in the EEA
(so including the Main Market of the London Stock Exchange).
2. What is short selling and what different types of short selling are there?
Short selling is agreeing to sell shares that you do not own, intending to buy them shortly after at a lower price, and therefore
make a profit.
Covered short selling is agreeing to sell shares that you have borrowed, arranged to borrow or arranged to buy.
Naked short selling is agreeing to sell shares that you do not own and have not arranged to borrow or buy.
3. What is banned or restricted under the new regime?
Under the Regulation, short sales are only permitted where the short seller has:

borrowed the shares;

entered into an agreement to borrow the shares or has another absolutely enforceable claim under contract or property law
to be transferred ownership of a corresponding number of shares of the same class; or

made other arrangements with a third party under which that third party has confirmed the shares have been located and
there is a reasonable expectation that settlement can be effected when it is due.
Therefore naked short selling is banned, but intra-day uncovered short selling is permitted if the conditions set out in the
Regulation are met.
The ban on naked short sales is not intended to capture securities lending agreements, futures contracts or other derivative
contracts where it is agreed to sell securities at a specified price at a future date.
Subscription rights that can be converted into new shares before or at the settlement date may be used to cover short selling.
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In addition, there are provisions in the Regulation permitting wider short selling bans in specific circumstances:
4.

where the price of a financial instrument on a trading venue has fallen by a specified amount or more during a single
trading day in relation to the previous closing price, the competent authority for the venue must consider whether it is
appropriate to impose a temporary prohibition or restriction on short selling that instrument on that venue to prevent a
further disorderly decline in its price. The FSA has set out the framework it will use when determining whether or not to
impose such a temporary suspension in its Financial Stability and Market Confidence Sourcebook (FINMAR); and

in the case of a financial emergency in a Member State, the competent authority of the Member State is permitted
under the Regulation to intervene and impose restrictions or a prohibition on short selling generally, or in connection
with specified instruments, for an initial period of up to three months. The European Securities and Market Authority
also has its own powers to intervene to ban or limit short selling of financial instruments for a period of three months
where an emergency situation has cross-border implications and the relevant competent authorities have not
adequately addressed the threat.
What is the background to the new short selling regime?
The financial crisis precipitated by events such as the collapse of Lehman Brothers in September 2008 resulted in short selling
bans and disclosure rules to restore order to turbulent markets in the US, the UK, Ireland, Switzerland, Canada, Luxembourg,
Germany, Belgium, Portugal, Netherlands, France, Australia, and Spain.
The measures taken in different European Member States varied and the Regulation is intended to create a single Europe-wide
regulatory framework for short selling.
In the UK, the Financial Services Act 2010 amended the Financial Services and Markets Act 2000 (FSMA) to provide the
Financial Services Authority with a power to make rules to prohibit, or require the disclosure of, short selling with effect from
June 2010. The FSA exercised its powers under the FSMA to amend the FSA Handbook from August 2010 to include a new
Sourcebook, FINMAR, which contained the FSA's disclosure rules on short selling and which replaced the short selling
provisions previously contained in the Code of Market Conduct.
In 2010 the FSA noted that the rules were not intended to be permanent and that they would be superseded once a European
short selling disclosure regime was finalised.
5. What do I have to disclose under the new regime?
Disclosure of net short positions is by way of private notification at 0.20%+ and then public disclosure at 0.5%+:
NET SHORT EQUITY
POSITIONS ≥ 0.20%
OF ISSUED SHARE
CAPITAL
To
who
How
0.10% INCREMENTS
(UP UNTIL 0.50%)
NET SHORT EQUITY
POSITIONS ≥ 0.50% OF
ISSUED SHARE
CAPITAL
0.10% INCREMENTS
Private notification to the competent authority of
the most relevant market in terms of liquidity for
that financial instrument:
Public disclosure to the competent authority of the most
relevant market in terms of liquidity for that financial
instrument:
LSE Main Market listed = FSA
LSE Main Market listed = FSA
Email form "Private notification of shares" to FSA
Email form "Public disclosure of shares" to FSA
FSA publishes details on its website
When
Net short positions are calculated at midnight and reported by 15:30 next trading day
(according to the time in the Member State to which the report is made)
The term "issued share capital" in relation to a company means the total of ordinary and any preference shares issued by the
company (but does not include convertible debt securities).
In relation to UK disclosures, persons make their notifications and disclosures of net short positions to the FSA by email.
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The first time that a natural or legal person discloses a position they must provide a signed letter to the FSA, on printed headed
paper including the address of the person, outlining the contact details of those individuals who will be notifying and disclosing
positions on their behalf.
A person making a private notification must complete the "Private notification of shares" form and email it to the FSA at
privatedisclosuresSSR@fsa.gov.uk. If a person has notified a position and the position subsequently falls below 0.2%, they
should email a "Cancellation notification of shares" form to the FSA.
A person making a public disclosure of a net short position in shares above 0.5% must complete the "Public disclosure of
shares" form and email it to the FSA at publicdisclosuresSSR@fsa.gov.uk. The FSA will then make this information available to
the public on its short selling webpages, updated daily. Additionally, if a person has disclosed a position publically and the
position subsequently falls below 0.5% they should make this change in position public (even if the resulting position is below
0.2%), by emailing a "Cancellation of public disclosure of shares" form to the FSA. A private notification will also need to be
made if the position remains above 0.2% but below 0.5%.
The FSA forms require details of the position holder, name of issuer, ISIN of the security, net short position (per cent) and the
date on which the position was created, changed or ceased to be held.
The information is not required to be released via an RIS. If an issuer wishes to find out who holds net short positions in its
shares, it will need to check the FSA website.
Disclosure is required regardless of whether the net short position is accumulated on a trading venue or outside a trading venue
(such as over-the-counter (OTC)), and regardless of where the person effecting the sale is domiciled or established, including
outside the EU.
The Regulation requires net short positions to be determined at midnight at the end of the trading day. Disclosure must then be
made by 15:30 on the next trading day. All times are calculated according to the time in the Member State of the relevant
competent authority to whom the relevant position must be notified or disclosed. With three different time zones within the EU,
the Regulation requires entities engaged in short selling to perform multiple short sale analyses on a daily basis.
6. How does the new regime differ from the UK's previous short selling rules and what has happened to
the UK rules?
In the UK, the FSA Handbook, FINMAR Chapter 2, required public disclosure of net short positions of 0.25% in selected UK
financial companies and issuers undertaking rights issues. The Regulation has direct effect in EU Member States and so the
disclosure related provisions of FINMAR have been deleted and the UK short selling rules abolished with effect from 1
November 2012.
What is left in FINMAR are some technical rules and those relating to how the FSA will use its temporary suspension powers
(see Q3 above).
The new EU regime is wider than the previous UK rules. FINMAR did not ban short selling, but contained disclosure
requirements. The Regulation bans all naked short selling, both on and off-market. The old FINMAR disclosure regime applied
only to companies who were undertaking rights issues and certain financial institutions. The Regulation applies to all companies
whose shares are admitted to trading on a regulated market or multi-lateral trading facility. It also expressly covers both on and
off-market positions.
7. Will existing net short positions have to be disclosed on 1 November 2012?
Net short position previously disclosed under FINMAR
Notification or disclosure must be made by 3.30pm on 2 November 2012 of existing net short positions, even if they have
already been disclosed under FINMAR. Notification or disclosure must be made in the required new manner (see Q5 above), by
emailing the correct form to the FSA.
Net short position not previously disclosed under FINMAR
Net short positions covered by the Regulation that were not previously required to be disclosed under the FINMAR regime must
also be notified or disclosed by 3.30pm on 2 November 2012.
8. How is a net short position calculated under the new regime?
A net short position is the position that remains after deducting any long position that a person holds in the issued share capital
of a company from any short position that a person holds in the issued share capital of that company.
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In calculating long or short positions, entities are required to include not only direct long or short positions, but all transactions
the effect of which is to confer a financial advantage in the event of an increase or decrease in the price or value of the share or
instrument.
Calculations must include indirect positions such as by way of any index, basket of securities, interest in any exchange traded
funds or similar entity, options, futures, contracts for differences and spread bets relating to shares. Calculations regarding such
indirect short or long positions must be made reasonably, having regard to publicly available information as to the composition
of the relevant index, basket or exchange traded fund.
The calculation of net short positions includes transactions executed on a manual basis and those executed after-hours.
Any derivative and cash position should be accounted for on a delta-adjusted basis as set out in the Delegated Regulation (No
918/2012), with cash having the delta 1.
Disclosure is broadly on a legal entity basis, although see Q9 below on disclosure for groups of companies.
9. How does a group of companies calculate its net short position under the new short selling regime?
All net short and long positions of all legal entities constituting the group should be aggregated and netted, with the exception of
management entities, to establish the position at group level and:

an individual legal entity should notify or disclose its net short position unless a net short position at group level also reaches
or crosses a threshold;

if a group level net short position reaches or crosses a threshold, the group should notify or disclose accordingly, even if no
notification or disclosure threshold is reached by any one legal entity with the group; and

if a notification or disclosure threshold is reached or crossed simultaneously by one legal entity and the group (even if
different thresholds are crossed or thresholds are crossed in different directions), only the group should make a notification
or disclosure.
10. Are there any exemptions available from the new restrictions and disclosure requirements?
The exemptions from the Regulation are:
Principal trading venue outside the EU
The rules in the Regulation relating to disclosure and naked short sales in shares do not apply to shares which have a dual
listing and are principally traded outside the EU. ESMA will publish, bi-annually, a list of shares falling under this exemption (see
the ESMA website for the first list).
Issuers domiciled outside the EU whose principal trading venue is inside the EU are still covered.
Market makers and authorised primary dealers
The disclosure and naked short selling rules also do not apply to transactions performed due to market making activities, since
market makers often need to take short positions to perform their role of providing liquidity, and generally do so only for short
periods.
However, the Regulation requires central counterparties to have procedures in place which effectively fine sellers who fail to
settle short trades within four days. The market maker exemption does not apply to these 'buy-in' procedures.
Primary dealers are exempt from the disclosure requirements and naked short selling prohibition where acting in relation to a
buy-back programme or stabilisation scheme.
Market makers and primary dealers must notify the competent authority of their home Member State (or if they are located in a
third country, the competent authority of their main EU trading venue) at least 30 days in advance of using the exemption if they
wish to rely on it. Those relying on the exemption may be subject to information requests relating to trading under the exemption
from their competent authority and must be prepared to respond to such requests quickly, that is within four calendar days.
11. What record keeping is required under the new short selling regime?
The Regulation introduces a five year record-keeping obligation, requiring parties to keep records not just of their net short
positions but of the gross positions which support net short position calculations.
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12. What are the sanctions for breach of the Regulation?
The Regulation requires Member States to establish rules on penalties and administrative measures applicable to infringements
of the Regulation.
In the UK, the FSA has stated that it will apply its existing penalty policy set out in its Decision Procedure and Penalties Manual
to any breaches of the Regulation. Default could therefore result in censure, fine or revocation of the authorisation of an
authorised person or firm.
13. How does the new disclosure regime interact with DTR 5 and the Takeover Code?
In the UK, the Regulation sits alongside the existing disclosure regime contained in DTR 5 on the disclosure of interests in
voting rights. Both regimes must be considered separately as they are based on different tests, have different disclosure
thresholds and disclosure must be made in different ways. DTR 5 is only concerned with the disclosure of long positions, that is
ownership of shares, control of voting rights or financial instruments which give rise to rights to acquire shares (or have a similar
economic effect).
Similarly, in a takeover offer situation, the Regulation sits alongside the disclosure regime contained in the UK Takeover Code.
In brief, under Rule 8 of the Code short positions must be disclosed as part of an opening position disclosure at the start of an
offer period, and then any increase or decrease in a short position that crosses a relevant threshold must be disclosed.
What
Long positions
What
Dealings
Long positions
Short positions
Thresholds
How
DTR 5
UK issuer 3%+
±1% changes
ThresholdsTakeover
Form TR-1 to issuer
and FSA
Parties to offer 0%+
Issuer via RIS
Others 1%+
(Non-UK issuers 5%+)
Dealings
Opening positions
Opening positions
Takeover
Code
How
Panel form released
via RIS
±1% changes
When
When
Within 2 trading days to UK issuer
Opening position at start
of an offer period
What
(4 trading days to non-UK issuer)
Short positions
Issuer to RIS next trading day
Thresholds
0.2%+ private
Dealings
How
Short Selling
Regulation
0.5%+ public
±0.1% changes
Dealing – parties to offer, by noon
next trading day; others by 3.30pm
next trading day
Email [FSA
correct
form to
form
FSA
FSA website]
Public disclosures
added to FSA
website
When
By 3.30pm next trading day
14. Links to sources
For more information, see:

Short Selling Regulation No 236/2012

Delegated Regulation No 826/2012 (regulatory technical standards on notification and disclosure requirements)

Implementing Regulation No 827/2012 (the means for public disclosure of net short positions etc.)

Delegated Regulation No 918/2012 (definitions, calculation of net short positions etc.)

Delegated Regulation No 919/2012 (regulatory technical standards for the method of calculation of the fall in value for liquid
shares and other financial instruments)

ESMA Q&A on the Regulation
 FSA short selling webpages (containing the various notification and disclosure forms and the FSA email addresses for
notification and disclosure purposes)
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Contacts
Karen Anderson (Partner)
T +44 20 7466 2404
M +44 7809 200 009
karen.anderson@hsf.com
Sarah Hawes (Professional Support Lawyer)
T +44 20 7466 2958
M +44 7809 200 285
sarah.hawes@hsf.com
Nikunj Kiri (Partner)
T +44 20 7466 2902
M +44 7785 254 976
nikunj.kiri@hsf.com
Will Pearce (Partner)
T +44 20 7466 2622
M +44 7785 254 976
will.pearce@hsf.com
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© Herbert Smith Freehills LLP 2012
The contents of this publication, current at the date of publication set out above, are for reference purposes only. They do not
constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should
always be sought separately before taking any action based on the information provided herein.
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