Short selling

A short sale in relation to a share or debt instrument is any sale of the share or debt instrument which the seller does not own at the time of entering into the agreement to sell.

In the aftermath of the financial crisis in September 2008, the competent authorities in several Member States and the supervisory authorities in third countries such as the United States of America and Japan adopted emergency measures to restrict or ban short selling in some or all securities. This was motivated by concerns that short sales in times of considerable financial instability could accelerate the downward spiral in share prices, in particular of financial instruments, which would ultimately threaten the viability of financial institutions and could give rise to systemic risks. Due to the absence of a uniform EEA regulatory framework to deal with issues related to short selling, the measures which were taken were, however, very different in nature.

As a result of this, the EU enacted corresponding harmonisation measures aimed at ensuring the proper functioning of the internal market, in particular with regard to the financial markets, and at ensuring a high level of consumer and investor protection.

EU Regulation No. 236/2012 on short selling and certain aspects of credit default swaps (Short Selling Regulation, SSR) has been in force since 1 November 2012.

The SSR rests essentially on two pillars:

• prohibiting provisions for uncovered short sales in shares and sovereign debt as well as for uncovered sovereign credit default swaps (CDS) (Articles 12 et seqq. of the SSR); and
• transparency provisions for net short positions in shares, sovereign debt and, where applicable, CDSs (Articles 5 et seqq. of the SSR).

Uncovered (naked) short selling occurs where a seller sells a financial instrument that, at the time of sale, the seller does not own or is not entitled to obtain. The short seller must, however, have acquired the financial instrument by the time the sale is consummated. In contrast, a covered short sale is one in which the seller has, at the time of sale, secured ownership rights to the financial instrument sold short.

Under the SSR, natural and legal persons may enter into short sales in a Member State or a third country. In this context, it is irrelevant where the respective contract is entered into, and the nationality and domicile of the parties involved are just as irrelevant. In addition, some of the SSR’s provisions apply to all financial instruments (see Article 1(2) of the SSR).

The SSR provides exemptions for market making activities and primary dealers.

Pursuant to Article 1, the SSR applies to

a) financial instruments within the meaning of Article 2(1)(a) that are admitted to trading on a trading venue in the Union, including when such instruments are traded outside a trading venue;

b) derivatives referred to in points (4) to (10) of Section C of Annex I to Directive 2004/39/EC that relate to a financial instrument referred to in a) above or to an issuer of such a financial instrument, including when such derivatives are traded outside a trading venue;

c) debt instruments issued by a Member State or the Union and derivatives referred to in points (4) to (10) of Section C of Annex I to Directive 2004/39/EC that relate or are referenced to debt instruments issued by a Member State or the Union.

According to Article 1(2) of the SSR, Articles 18, 20 and 23 to 30 apply to all financial instruments within the meaning of Article 2(1)(a).