The Committee of European Securities Regulators (CESR), the body charged with ensuring consistent securities regulation across EU member states, has recommended the introduction of a pan-European regime for disclosing net short positions in equities.
CESR said those members that already have powers to introduce a permanent disclosure regime will now begin implementing the new rules, while those without the necessary powers will aim towards implementing the new regime on a best efforts basis until an EU regime is adopted.
The committee has proposed a two-tier model for the disclosure of significant individual net short positions in all shares that are admitted to trading on a European Economic Area (EEA) regulated market or a multilateral trading facility when the shares’ primary market is located in the EEA.
Under the proposed regime, market participants must disclose short positions to the relevant competent authority when they hit 0.2% of the issued share capital in a stock. Disclosures will be required in 0.1% steps above this. Positions of 0.5% or any 0.1% steps above that level must be disclosed to both the relevant authority and the market as a whole.
Disclosure reports to the regulator or the market should be made on the trading day following the breach of the relevant threshold. Market making activities will be exempted from the disclosure requirements.
In calculating whether a disclosure is required, market participants should aggregate any position that provides economic exposure to a particular share, including positions held in exchange-traded instruments and over-the-counter derivatives. Disclosure calculations and reports will be done on a net basis, with any long exposures to a share subtracted from the short positions.
CESR said it recognised that legitimate short selling plays an important role in financial markets, but argued that it can be used abusively to drive down the price of financial instruments.
“The regime would help to identify and restrain potentially abusive behaviour at an early stage and allow regulators to take timely preventive measures,” said Anastassios Gabrielides, chairman of the Capital Market Commission of Greece and chair of CESR-Pol, an operational group within CESR responsible for the surveillance and exchange of information. “While private notifications to the regulators would be used for daily market supervision activities, public disclosure of short positions is considered to provide informational benefits to the market.”
CESR said it would continue to work in the coming months on the short disclosure issue to ensure greater clarity on the technical details necessary to implement the new regime effectively.
Several European jurisdictions introduced temporary short position disclosure regimes following the 2008 financial crisis. The UK Financial Services Authority’s regime, which is still in force and has an indefinite expiry date, requires participants to disclose short positions of more than 0.25% of a company’s issued share capital and any increases of 0.1% above that level.
Last week, the US Securities and Exchange Commission adopted short selling restrictions, which take effect once a stock has dropped more than 10% in a day. Once the threshold has been hit, short selling in the affected stock is only possible if the price is higher than the current national best bid.