EU Regulation on Short Selling and certain aspects of credit default swaps (SSR) aims to increase the transparency of short positions held by investors in certain EU securities, to reduce settlement risks and other risks linked with naked short selling, and to ensure that Member States have clear powers to intervene in exceptional situations to reduce systemic risks and risks to financial stability and market confidence.
The Regulation introduces a series of requirements:
- all short sales of shares must be covered (i.e. naked short selling in shares is banned);
- all short sales of sovereign debt instruments must be covered (i.e. naked short selling in sovereign debt is banned) and all credit default swaps positions related to a sovereign issuer must not lead to uncovered positions (i.e. naked sovereign CDS are banned);
- significant net short positions (NSPs) in shares must be reported to the relevant competent authorities (when they reach 0.2% of the issued share capital and every 0.1% above that) and disclosed to the public (when they reach 0.5% of the issued share capital and every 0.1% above that);
- significant NSPs in sovereign debt must be reported to the relevant competent authorities when reaching or crossing one of the thresholds published by ESMA for sovereign issuers.
Exemptions are foreseen for market making activities and authorised primary dealers.
Upon verification of a series of conditions, the SSR provides the Relevant Competent Authorities (RCAs) with intervention powers, such as:
- temporarily restrict short selling of a financial instrument further to a significant fall in price (short-term ban). This measure cannot exceed the end of the trading day after the one in which the measure has been adopted and can be extended for additional two days;
- exceptional enhance transparency vis-a-vis RCAs or the public;
- introduce restrictions on short selling or NSPs in relation to identified financial instruments or classes of financial instruments (long-term ban). Whenever a RCA intends to adopt a long-term ban, ESMA issues an opinion on whether the measures and its duration are appropriate and proportionate to address the threat.
In exceptional circumstances, ESMA can also resort to intervention powers, such as directly require additional reporting to RCA or disclose to the public the NSPs in relation to a specific financial instrument or class of financial instruments or directly introduce restrictions on short selling or NSP on financial instruments.
The SSR required ESMA to draft a series of Regulatory and Implementing Technical Standards (RTS and ITS) in relation to:
- the 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 and the method for calculating turnover to determine exempted shares;
- 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 of sovereign debt instruments are available for settlement and the dates and period for the determinisation of the principal venue for a share; and
- the method of calculation of the fall in value for liquid shares and other financial instruments.
To enhance, clarify and foster convergence in the implementation of the exemption for market making activities and primary market operations, ESMA has issued guidelines to competent authorities and financial market participants. Information about the ESMA guidelines process, their status and related documents is available in the Guidelines and Technical Standards page.
Additionally, ESMA has published a Questions and Answers (Q&A) document that clarifies the technical aspects of practical implementation of the Regulation.
Finally, ESMA was mandated to provide technical advice to the European Commission on a series of relevant topics.
According to the provisions of the SSR, ESMA has to provide for public access to certain types of information:
- significant net short position notification thresholds for each sovereign issuer;
- links to the national websites where the procedures for notifications of net short positions are explained;
- links to central websites operated or supervised by competent authorities where the public disclosure of net short positions in shares is posted;
- the list of exempted shares for which the principal trading venue is located in the third country;
- a list of market makers and authorised primary dealers PDF; Excel
- a list of existing penalties and administrative measures applicable in Member States.