1. The EU Short-Selling Regulation
On 1 November 2012 EU Regulation Nr. 236/2012 ("Regulation") on short selling and certain aspects of credit default swaps ("CDS") will enter into force. The Regulation has direct effect and replaces in its entirety the current national short selling regime in the Netherlands that has been in effect since 1 June 2009.
The three cornerstones of the Regulation are:
- the obligation to notify net short positions in shares which have been admitted to trading on regulated markets and multilateral trading facilities ("MTF") in the European Union and sovereign debt of EU Member States above a certain threshold to the relevant competent authority. In The Netherlands this is the Netherlands Authority on Financial Markets ("AFM");
- a restriction on entering into uncovered naked short selling transactions; and
- a restriction on holding an uncovered naked position in CDS contracts on sovereign debt.
Besides the measures contained in the Regulation, legislative proposals contained in the bill on the Financial Markets Amendment Act 2013 (Wijzigingswet financiële markten 2013) and the bill on the Corporate Governance Act (Wet corporate governance maatregelen) will impose additional reporting obligations for short selling transactions if and when they enter into force as they read now.
2. Uncovered short selling and uncovered CDS
An uncovered (naked) short selling transaction within the meaning of the Regulation is a transaction where the seller of a share or sovereign debt does not possess the share or sovereign debt when entering into the transaction.
An uncovered (naked) position in CDS contracts occurs when the CDS contracts do not serve as a hedging instrument for a long position in sovereign debt or a portfolio of financial contracts, assets or obligations, the value of which is correlated to the value of the sovereign debt.
3. Reporting of net short positions
The Regulation only requires the reporting of net short positions. Any short position held can and must be offset with any long position an investor holds in the relevant share or sovereign debt instrument.
A short position held indirectly through a fund, ETF or basket of securities must be included in the calculation of an investor's net short position insofar as this is reasonably possible, based on publicly available information. The European Commission has published specific rules concerning the calculation of short and long positions in its delegated regulation nr. 918/2012.
ESMA also published information on calculating positions in its Q&A.
Each investor holding a net short position equal to 0.2% of the issued share capital of a company must report it to the AFM. Each increase of this position by 0.1% will also have to be reported.
Each net short position equal to 0.5% of the issued share capital of a company and any increase of that position by 0.1% will be published in a public register administered by the AFM.
Investors must also report a net short position in sovereign debt of EU Member States or a supranational issuer such as the European Financial Stability Facility ("EFSF") above a certain threshold to the relevant competent authority. The AFM is the relevant competent authority for sovereign debt issued by The Netherlands.
ESMA has published the thresholds for each Member State on its website.
4. Restrictions on uncovered short selling transactions
The Regulation introduces restrictions on entering into uncovered short selling transactions in shares or sovereign debt. A market participant may only enter into a short selling transaction if when entering into the transaction he has:
- borrowed the shares or sovereign debt instruments;
- a directly enforceable claim for the transfer of the shares or sovereign debt instruments before the agreed settlement date; or
- entered into an arrangement with a third party and the third party has confirmed that the shares or sovereign debt instruments have been located and that there is a reasonable expectation that settlement of the transaction will occur on the agreed date (the "locate rule").
5. Uncovered CDS contracts on sovereign debt
The Regulation provides that a market participant may only enter into a CDS contract on sovereign debt as long as this transaction does not lead to an uncovered position in CDS contracts on sovereign debt. A CDS contract is not uncovered when it is entered into to hedge:
- a long position in the underlying sovereign debt; or
- a portfolio of financial contracts, assets or obligations, the value of which is correlated to the value of the sovereign debt.
6. Short selling measures in the Netherlands
The bill on the Financial Markets Amendment Act 2013 contains an obligation for shareholders of a listed company who have submitted a request to add an item to the agenda of the general meeting of shareholders to disclose their holding of shares in the company as well as any short position in the shares of the company which they hold. This bill will enter into force on 1 January 2013.
The bill on the Corporate Governance Act amends the Dutch Financial Supervision Act ("Wft") and requires investors who hold a gross short position equal to 3% of the issued capital of a company to report such position to the AFM. The major difference with the Regulation is that this reporting obligation applies to gross short positions. A short position may not be offset against a long position in the shares of the company. The method for calculating a short position under this amendment is not available yet but the AFM may make the already existing method for calculating long position also applicable to the calculation short positions. The date of entry into force of this bill is not clear yet.