Alert October 16, 2012

Reminder: European Short Selling Regulation Effective November 1 Applies to US Persons

The European Short Selling Regulation (previously discussed in the July 10, 2012 Financial Services Alert) comes into effect on November 1, 2012.  U.S. persons trading in stocks listed on European exchanges, even when the trade is executed outside the European Economic Area (the “EEA”), e.g., when the short sale of a stock listed on both European and non-European exchanges is executed on the latter or executed OTC, will be subject to number of requirements, including the following:

  • Net short positions of 0.2% (and incremental changes thereto) and above must be disclosed to the relevant regulatory authority in the EEA.  Net short positions above 0.5% (and incremental changes thereto) must be publicly disclosed.  Disclosures will need to be made in both cases via reporting systems established by the regulator in the country where the relevant market is established.
  • Uncovered short positions are prohibited (even if they are permitted under US law and the rules of the US exchange where the trade in a dually-listed stock is undertaken).

An exemption is available with respect to positions taken by a market maker as part of the function of market making, subject to the following conditions: (i) the European Commission must have determined that the non-EEA exchange operates under equivalent standards to those in the EEA (to date, the Commission has made no such determinations); and (ii) the market maker has given at least 30 days’ notice to the relevant regulatory authorities that it will use the exemption (although it is still not yet clear to which authorities such notice should be submitted).

These provisions do not apply if the primary market (judged by turnover) for a dually listed stock is based outside the EEA.

As previously noted, the European Short Selling Regulation also includes restrictions on short positions in government debt.