The EUs tough new short selling regime became
effective on November 1. Its impact stretches far beyond the
EUs borders, but there is still uncertainty among non-EU
investors as to what they should be doing.
Finalised in March, the regulation significantly restricts
traders ability to short-sell bonds and shares and buy credit
insurance. The regime came into force four years after
individual countries imposed their own short-selling bans following market
turmoil caused by the Lehman Brothers collapse.
Key features include new reporting obligations for
significant net short positions in the European Economic Area
(EEA) listed shares and sovereign debt, a ban on naked physical
short sales of EEA listed shares and sovereign debt; and a
wide-ranging ban on credit default swap (CDS) positions in EEA
At the highest level, its better to
have one set of rules across the whole EU than 27 different
regimes, said Adrian Hood, regulation adviser with the
Investment Management Association. However, the process
by which we got this regulation and the detail of it is far
is the process through which investors borrow stock they
believe is overvalued, sell it, and buy it back to return to
the owner once the price has fallen.
Hood, the European
Securities and Markets Authority (Esma)
has failed to give
sufficient guidance on issues as
basic as definitions of what is and isnt
But the situation gets even more complex because
the wide-ranging regulation covers trading both
inside and outside the EEA. It marks the first time that a
European regulation has a direct impact on the trading
activities of US entities that is conducted entirely
David Freedman, a partner with Baker & McKenzie
in New York said the regulation impacts everybody, everywhere.
While that shouldnt come as a surprise, people were
not necessarily fully prepared for it, he said.
Indeed, the new rules have hit US firms already
dealing with a substantial Dodd Frank compliance burden
One key implication for firms outside the EU is the
level of internal systems configuration. Market participants
must find out whether they have a reportable position regarding
both shares and sovereign debt. If they have a sovereign debt
CDS, they also need to know whether its deemed to be
Theres no de minimus
exemption so investors have to look through everything they own
everywhere and find out whether they need to report it,
said Freedman. Thats just massive.
And while Esma has said entities only need rely on publically available information
to do the calculations, this still involves finding that
information and monitoring when it changes on a real-time
Theres a very large cost and the
benefits of having this reporting system are yet to be
indicated or proven, said Freedman.
There could also be competing layers of compliance
for the same security. American depositary receipts (ADRs) are
considered a US security for regulation SHO purposes, but will also be covered
by the EU regime, unless its an exempted share.
So, whats the advice for US investors?
According to Freedman, its crucial to get systems up and
Those with a position indirectly via an index,
basket of securities or an exchange traded fund (ETF) will need
to find out on a real time basis before midnight of the
relevant trading venues time whether they have a
reportable position and be ready to disclose the following
The time difference makes this particularly
challenging for US-based asset managers.
They need to get all their orders processed
to make their calculations, then somebody has to go in early in
the morning or stay late to make the filing, said
Freedman is also advising clients that if they
havent already had to make a filing, they should
pre-emptively get all of the log in details so they have them
if they do have to make a filing.
And when regulators say you have to do it
electronically via the reporting platform, that means they
dont want an email, you have to upload it, he
Investors are advised to review the list of exempted shares. Funds with a position on
a company that should be on the list but isnt, need to
contact the competent authority for that issuer and ask them to
amend the list.
Monitoring Esmas Q&As is another tip. Questions can
be sent to Esma to request clarification.
Hurricane Sandy meant that many Wall Street funds were closed last week.
Thats force majeure, but on the
other hand theres no exemption in the short-selling
regulation for a hurricane battering Wall Street, said
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