This post was last updated on 1 April 2020 to reflect updated guidance from the FCA.
SHORT SELLING REGULATION
During this unprecedented period of disruption, the European Securities and Markets Authority (ESMA) and other national regulators have taken various extraordinary steps to address the risks faced by financial markets in the EU.
In the past week, ESMA has issued a decision amending the notification threshold for net short positions under the EU Short Selling Regulation (SSR), with some local regulators also imposing temporary prohibitions on short selling transactions. While there has not been any change in the way that the underlying legislation operates, the practical impact of these steps will restrict activity in some markets. Firms involved in short selling need to adjust for the increased transparency obligations.
1. ESMA - new short thresholds
On 16 March, ESMA published its decision to lower the threshold at which persons who hold net short positions in companies whose shares are admitted to trading on an EU regulated market must report to national regulators to 0.1% of the issued share capital (down from 0.2%).
This lower threshold applies automatically across all EU countries. It will be in place for three months, although ESMA may extend this. Certain exemptions continue to apply, including:
- net short positions arising from market making and stabilisation activities; and
- net short positions held in shares admitted to trading on an EU regulated market where the principal venue for the trading of the shares is located in a third (ie non-EU) country.
2. National regulators - temporary bans on short selling
In addition to the new EU-wide lowered reporting threshold, national regulators in certain EU jurisdictions have implemented temporary restrictions on any short selling of securities admitted to trading on regulated markets in their jurisdictions (both new and increasing net short positions). A summary table showing the relevant jurisdictions and duration of each prohibition is below:
|Jurisdiction||National regulator public statement||Date prohibition imposed||Prohibition imposed until|
|France||AMF||18 March||16 April|
|Belgium||FSMA||17 March||17 April|
|Spain||CMNV||17 March||17 April|
|Austria||FMA||18 March||18 April|
|Greece||HCMC||17 March||24 April|
|Italy||CONSOB||18 March||18 June|
Generally, those short selling transactions undertaken by market makers are exempt, and special provisions apply to index-related instruments. However, as these prohibitions are applied on a national (not EU-wide basis) firms will need to confirm the scope and application of the bans in each of the relevant jurisdictions (including any subsequent clarificatory guidance which may be published). For example, the FMA in Austria has provided follow-up confirmation that the scope of the prohibition applies to any new individual short sales transactions carried out during temporary restriction, not new overall net short positions. This means that the entering into, creation or increase of any short sale (or any other transaction that has the same effect) is prohibited, regardless of any offsetting long position.
3. Position in the UK
The FCA has applied ESMA’s amendment to the reporting threshold for net short selling positions (i.e. lowered from 0.2% to 0.1%). However, in a statement made by the FCA on 17 March 2020, firms were told to continue to report data in the UK using the previous threshold until further notice, while the FCA made the necessary technological changes in how it receives the data. Since then, the FCA has confirmed that the required changes have been made and that it will be ready to receive notifications at the lower threshold from 6 April 2020. Firms are not required to amend and resubmit notifications submitted to the FCA between 16 March 2020 and 3 April 2020. Firms should make best efforts to report at the lower threshold from 6 April 2020. Firms should contact the FCA if they are unable to amend their systems by this date.
The FCA has not as yet implemented any specific restrictions on short selling in shares admitted to trading in the UK. In a number of recent statements, the FCA noted that it has never initiated an outright ban on short selling UK shares under SSR, and would set a high bar on imposing any such ban, but could not rule out that this might become appropriate in certain circumstances.
While the FCA’s statements do not suggest that a ban on short selling on shares admitted to UK regulated markets is imminent, firms should continue to monitor regulatory statements on this topic, as changes may be imposed on short notice.
4. Non-EU markets
Firms should note that non-EU markets might have their own short selling reporting requirements/restrictions and monitor these accordingly.
DELAYS TO SECURITIES FINANCING TRANSACTIONS REGULATION (SFTR) REPORTING REQUIREMENTS
ESMA postpones implementation of reporting under SFTR
On 18 March, ESMA postponed the Securities Financing Transactions (SFT) reporting obligation start date from 13 April 2020, in light of COVID-19 disruption on wider implementation projects.
Trade repositories are also not required to be registered by 13 April 2020. All relevant parties (including trade repositories, entities responsible for reporting and investment firms) should be prepared for compliance by 13 July 2020, when the next phase of the reporting regime begins.
 With the exception of imposing a one day ban on certain Spanish and Italian securities following a request from CNMV and CONSOB on 13 March 2020.
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 this publication.
© Herbert Smith Freehills 2020