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During the 2008 financial crisis, several countries took emergency measures on short selling over concerns that this activity was aggravating the downward spiral in share prices, thereby posing a threat to individual financial institutions and wider financial stability. Various measures were taken, ranging from restricting short sales to temporarily banning short selling in certain sectors. Other measures included introducing a requirement to disclose net short positions at certain thresholds. These developments led to the European Commission proposing, in September 2010, a pan-European short selling regime to provide a common framework for regulating short selling across Europe. This was adopted by the European Parliament and Council in March 2012.
The short selling regulation (SSR) introduces requirements for reporting significant net short positions on shares and sovereign debt. It imposes a two-tier disclosure regime: private disclosure to Competent Authorities (CAs) of net short positions for sovereign debt and sovereign credit default swaps (CDS), as well as shares at certain thresholds (0.2 per cent); and public disclosure for shares once a higher threshold has been passed (0.5 per cent). The SSR also introduces conditions for undertaking uncovered short selling and imposes restrictions on entering into uncovered sovereign CDS positions, along with various emergency powers to curb short selling. In addition to the various EU legislative measures, ESMA is drawing up guidelines regarding the market maker exemption on which it intends to consult shortly. ESMA may also draw up further guidelines in the future.
The SSR will apply from 1 November, 2012. The SSR is directly applicable in the UK, so it does not require specific implementation in domestic legislation and FSA rules. However, there are some areas in the SSR where Member States have discretion about the exercise of their powers, or the SSR requires matters to be dealt with in accordance with national law. The purpose of this Consultation Paper is to seek views and comments on our policies regarding the exercise of discretion and how we will implement the SSR in the UK.
Next steps
The consultation period closes on 20 September, 2012. FSA will then finalise any changes to the Handbook in light of responses. FSA is having a short consultation period due to the Financial Services Authority tight timelines for implementation of the SSR. However, FSA has actively engaged with interested stakeholders throughout the development of the European legislation and discussed our approach to implementation in a series of roundtables.