Regulation (EU) No. 236/2012 of the European Parliament and of Council on short selling and certain aspects of credit default swaps (the "EU Short Selling Regulation") was published in the Official Journal on 24 March, 2012 and came into operation on 1 November, 2012. The EU Short Selling Regulation could have implications for investment managers who are involved in the short selling of EU listed shares or sovereign debt.

The EU Short Selling Regulation; (i) requires persons (both legal and natural) to disclose net short positions in EU listed shares and EU sovereign debt1; (ii) restricts uncovered short sales of EU listed shares and EU sovereign debt; (iii) prohibits uncovered credit default swaps ("CDS") in EU sovereign debt which broadly speaking does not serve to hedge against exposure to the underlying sovereign debt; (iv) requires central counterparties that provide clearing services for shares to ensure that there are adequate arrangements for buy-in of securities where there is a failure to settle a transaction within four business days after the day on which settlement is due; and (iv) creates new powers for national regulators and for ESMA.

As this measure is enacted through an EU regulation, it is directly applicable in all EU Member States and no national measures are required to implement its requirements. This means that, for the first time, the rules relating to short selling are harmonized across the EU and the divergent rules in relation to short selling which were applied by individual EU Member States have been superseded.

The EU Short Selling Regulation is supplemented by a European delegated regulation as well as regulatory and implementing technical standards (collectively referred to as the "Level 2 Regulations") comprised of the following:-

(i) Commission Delegated Regulation (EU) No 826/2012 of 29 June, 2012 supplementing the EU Short Selling Regulation with regard to regulatory technical standards on notification and disclosure requirements with regard to net short positions, the details of the information to be provided to ESMA in relation to net short positions and the method for calculating turnover to determine exempted shares ("RTS 1 Regulation");

(ii) Commission implementing Regulation (EU) No 827/2012 of 29 June, 2012 laying down implementing technical standards with regard to the means for public disclosure of net position in shares, the format of the information to be provided to ESMA in relation to net short positions, the types of agreements, arrangements and measures to adequately ensure that shares or sovereign debt instruments are available for settlement and the dates and period for the determination of the principal venue for a share according to the EU Short Selling Regulation (the "ITS Regulation");

(iii) Commission Delegated Regulation (EU) No 918/2012 of 5 July, 2012 supplementing the EU Short Selling Regulation with regard to definitions, the calculation of net short positions, covered sovereign credit default swaps, notification thresholds, liquidity thresholds for suspending restrictions, significant falls in the value of financial instruments and adverse events (the "Delegated Acts Regulation"); and

(iv) Commission Delegated Regulation (EU) No 919/2012 of 5 July, 2012 supplementing the EU Short Selling Regulation with regard to regulatory technical standards for the method of calculation of the fall in value for liquid shares and other financial instruments (the "RTS 2 Regulation").

In addition to the above, ESMA has adopted a Q&A which will be updated and expanded on from time to time, the purpose of which is to promote common supervisory approaches and practices in the application of the European short selling regulatory regime. It provides responses to questions posed by the general public, market participants and competent authorities in relation to the practical application of the short selling framework.

The ESMA Q&A document can be viewed here: http://www.esma.europa.eu/system/files/2012-572.pdf

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Footnotes

1 The term EU should be understood to mean all member states of the European Union plus Norway, Iceland and Liechtenstein.

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