Pan-EU Short Selling Regulations in Effect

on Nov 8, 2012

New pan-EU rules on short-selling came into effect last week but many experts say these regulations will harm the stock and bond markets.

**EU Regulations**
The Regulation imposes a ban on “naked” short selling – selling shares without arranging to borrow them first – and also bans investors from buying credit default swaps on debt issued by sovereigns in the EU unless they can show they are hedging a long position. Investors are also obliged to notify short positions, which exceed the threshold of 0.2 percent of the company’s issued share capital. Once the threshold has been exceeded, every subsequent change of 0.1 percent or more in the position must be immediately disclosed to authorities. The same mechanism is in place for shorting sovereign debt but the thresholds are determined individually by each country.

The Regulation also gives supervising power to the European Securities and Markets Authority (ESMA), allowing it to restrict or completely ban short selling in exceptional circumstances including a financial crisis.
**Reactions to the New Regulations**
The Financial Times reported that many brokers, traders and investors were left unprepared and confused on 1 November when the pan-EU rules on short-selling came into effect. Many claimed that ESMA has failed to give them enough guidance on how to calculate the size of their short positions.

!m[New Rules’ Lack of Clarity Angers Traders, Brokers and Investors](/uploads/story/744/thumbs/pic1_inline.png)“It’s a shambles,” said Darren Fox, a partner at Simmons & Simmons who advises hedge funds. “People are crying out for clarity. I can’t remember another piece of European legislation being implemented this badly.”
Exemptions from the new short-selling rules will be given to market makers but ESMA is not expected to issue final guidance on qualifications criteria until late November. The UK’s Financial Services Authority (FSA) already set up an application procedure for all institutions who think they fit under the market maker category but told banks to turn to ESMA with questions on eligibility.

“There isn’t total clarity on how that market-making exemption will work,” said Richard Metcalfe of the International Swaps and Derivatives Association. “There is still debate about what actually constitutes market making and whether that has to be a frequent activity. That shouldn’t be the case.”
**Spain Extends Short-Selling Ban**
Spain’s market watchdog extended a ban on short-selling of securities for three more months to discourage investors who are trying to capitalize on the country’s ailing economy. ESMA called the ban “appropriate and proportionate” given “developments which constitute a serious threat to financial stability and to market confidence in Spain”.

Spanish banks welcomed the news as they are the ones most often targeted by short-sellers. “The bank restructuring process is still not completed, leading to uncertainty about the sector, which could affect financial stability. In this context, not banning short-selling could add to uncertainty,” regulator CNMV said in a statement on Thursday. Shares in the country’s banks have plunged in the past year, with biggest loser Bankia shedding 68 percent, while Popular lost 66 percent.
Recession struck Greece also extended its short-sales ban to January 31.
**David Einhorn Bets Against Daily Mail**
On 6 November famous short-seller David Einhorn revealed to the UK’s FSA that he is shorting Daily Mail and General Trust through his $7.7 billion (£4.82 billion) hedge fund Greenlight Capital. His position amounts to 4.4 percent of the company’s shares and is the biggest short position of any hedge fund against a UK company.
Shares of Daily Mail and General Trust have fallen from their Tuesday’s opening price of £4.8275 to Wednesday’s closing price of £4.64. According to the Audit Bureau of Circulations, Daily Mail had 1.9 million readers in September, 6.2 percent less from the same month a year earlier. The UK’s paper remains the second most read paper behind News Corp’s the Sun, which had a circulation of 2.4 million readers in September.


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