International Short Selling Regulation: Recent Developments
In response to recent developments in the United States and the United Kingdom to prohibit short sales of securities and to impose new disclosure requirements on persons engaging in short sales, regulators in other countries have instituted their own measures to address the concerns that led to the actions by regulators in the United States and the United Kingdom. In some countries, no actions have been taken. In others, local regulators have taken a number of approaches, including: banning short selling; adding new restrictions on short sales; or adding new disclosure requirements with respect to short sales. We expect that this will be an evolving area of the regulation around the globe, so clients and others should note that the information that follows is not intended to be viewed as reliable with respect to specific circumstances, and consultation with local counsel is encouraged.
The information in this update is current as of September 22, 2008, at 6 PM EDT. The information is being provided by Dechert LLP to its clients and others as a resource and for informational purposes only. Please note that Dechert has not sought to independently verify the information included in this update with local counsel. The information in this update is based on information from publicly available sources believed to be accurate as of the date indicated. The information in this update should not be considered as legal advice or opinions with respect to the laws, rules, or regulations of each of the jurisdictions discussed in the update, and should not be considered to be a substitute for consulting legal counsel in the jurisdictions mentioned. Descriptions and quotations of laws, rules, and regulations of countries where English is not the official language may not be based on an official translation and should not be considered the equivalent of a legally binding text. Please note that further information and clarifications of information in this update may become available subsequent to the publication of this update, so further inquiry regarding specific questions will likely be necessary.
Australia
The Australian Securities and Investments Commission (“ASIC”) announced on September 21, 2008, the implementation of new measures regarding short selling. Specifically, “naked short sales,” or the sale of a security without ownership or access to the underlying product, of most securities are prohibited. “Covered short sales,” or the sale of a security with ownership or access to the underlying product, are also prohibited with a limited market maker exception.
Duration of the Prohibition
The measures with respect to naked short sales take effect on Monday, September 22, 2008, and last until the adoption of subsequent legislation. The measures with respect to covered short sales also take effect on September 22, but the ASIC will “reassess and advise the market in 30 days, whether or not it will at that time, or at a later date, reopen covered short sales for non-financial stocks.”
Covered Securities
All listed stocks.
Covered Transactions
All short sales. ASIC will reassess within 30 days whether it will reopen the market for covered short sales for non-financial stocks.
Covered Persons
Transactions by all market participants are covered by the prohibition. A limited exception exists for covered short selling by Market Makers or Warrant Market Makers as those terms are defined in ASX Market Rules.
Disclosure Requirements
None.
Belgium
The Belgian Banking, Finance, and Insurance Commission (“CBFA”) announced on September 19, 2008, measures relating to short sales in order to “maintain cohesion among different marketplaces and to avoid abusive arbitrage activities.” The measures prohibit naked shorting of securities with voting rights attached issued by financial institutions.
Duration of the Prohibition
The measures become effective on September 22, 2008, and last for three months.
Covered Securities
The measures apply to voting securities issued by financial institutions and traded on Euronext Brussels.
Covered Transactions
The new rules prohibit transactions that are not 100% covered, if the sales order “may lead to delayed settlement and delivery of one of the securities in question.”
Covered Persons
The measures do not apply to intermediaries acting as market makers, liquidity providers or counterparties on block trades. Financial institutions are being “asked . . . to abstain” from lending covered securities unless it is a loan to cover a position that has already been taken.
Disclosure Requirements
Any person that owns a net short position representing 0.25% of the capital of one of the covered issuers must inform the CBFA within 24 hours of the change in position.
Canada
On September 19, 2008, the Ontario Securities Commission (“OSC”), the lead regulator of the Toronto Stock Exchange (“TSX”), issued a temporary order prohibiting the short selling of certain financial sector companies.
The measure was supported by the Canadian Securities Administrators (“CSA”), a coalition of the provincial securities regulators in Canada, who also stated that “[o]ther jurisdictions in the CSA will be taking similar action today, or in the coming days.”
Duration of the Prohibition
The probation takes effect immediately and expires on October 3, 2008, unless extended by a subsequent OSC order.
Covered Securities
The prohibition applies to 13 TSX-listed companies that have ties to the United States: Aberdeen Asia-Pacific Income Investment Company Ltd., Bank of Montreal, The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Fairfax Financial Holdings Limited, Kingsway Financial Services Inc., Manulife Financial Corporation, Quest Capital Corp., Royal Bank of Canada, Sun Life Financial Inc., Thomas Weisel Partners Group Inc., The Toronto-Dominion Bank, and Merrill Lynch & Co., Canada Ltd.
Covered Transactions
“Short sales” covered by the prohibition include sales of securities (other than derivatives) which the seller does not own directly or through an agent. A seller “owns” the security if the seller has entered into an unconditional contract to purchase the security or has exercised an
option, right or warrant to purchase or subscribe to the security and can deliver the security by the date for settlement. A limited exception exists for short sales that are:
- conducted in accordance with the Universal Market Integrity Rules (“UMIR”) Rule 3.1 (Restrictions on Short Selling);
- conducted in order to comply with UMIR Rule 5.2 (Best Price Obligation); or
- conducted by a person or company as a result of the automatic exercise or assignment of an equity option held prior to the effectiveness of this order due to expiration of the option.
Covered Persons
The order does not distinguish between different types of market participants.
Disclosure Requirements
None.
France
On September 19, 2008, the Autorité des Marchés Financiers (“AMF”) released a series of rules that defined as “market abuse” any sale of listed equity instruments issued by banks and insurance companies that was not “100% covered” in order “to maintain a regulatory framework that is consistent from one financial centre to the next, especially in Europe, and to prevent regulatory shopping.”
Duration of the Prohibition
The new rules take effect on Monday, September 22, 2008, and will last for three months, unless extended.
Covered Securities
The rules apply to trades in listed equity instruments of banks and insurance companies.
Covered Transactions
The rules apply to non-covered or “naked” short sales of the listed securities (including spot, forward, and option transactions involving the listed equities) on the Euronext Paris, MATIF, and MONEP markets.
Covered Persons
The rules do not apply to transactions made by “investment service providers acting as market makers, liquidity providers or as counterparties for block trades in equities.” Non-custodial brokers must require clients to deposit the securities to be sold or “obtain assurance from [their] client[s]” that the clients have the relevant securities. Financial institutions “are requested to refrain from lending any of the securities concerned in order to reduce the causes of market disruption.” Financial institutions may, however, lend the listed securities in order to cover existing positions, to meet commitments made before the announcement or to facilitate “transactions that are not related to creating short positions.”
Disclosure Requirements
Any person holding a net short position that represents 0.25% or more of the capital of one of the listed issuers must disclose it to AMF and the market “by any appropriate means” by the following day.
Germany
On September 19, 2008, the German securities regulator Bundesanstalt für Finanzdienstleistungsaufsicht (“BaFin”) announced the suspension of naked short selling in 11 German financial services firms.
Duration of the Prohibition
The prohibition went into effect on September 20, 2008, and will last through December 31, 2008, although BaFin stated it “will be reviewed on an ongoing basis.”
Covered Securities
The prohibition covers 11 German banks, insurers and other service providers, specifically the following: Aareal Bank AG; Allianz SE; AMB Generali Holding AG; Commerzbank AG; Deutsche Bank AG; Deutsche Börse AG; Deutsche Postbank AG; Hannover Rückversicherung AG; Hypo Real Estate Holding AG; MLP AG; and Münchener Rückversicherungs-Gesellschaft AG.
Covered Transactions
The prohibition applies to all naked short selling, i.e., transactions where, at the time of the transaction, the seller of the shares does not own or have a legal claim to a transfer of title of the shares sold. Exceptions to the prohibition include “name-to-follow” transactions by lead brokers, transactions by market makers and designated sponsors required for the performance of their contractual obligations, and short sales “used to secure existing positions.” Another exception, effective September 22, 2008, includes “fixed price transactions” or “transactions agreed by trading participants with a customer for settlement of a transaction in shares concluded at a fixed or definable price.”
Covered Persons
Certain transactions by lead brokers, market makers and designated sponsors are excepted from the ban, as noted above.
Disclosure Requirements
None.
Hong Kong
No activity reported (Hong Kong exchange rules allow only covered short selling of approved securities).
India
No activity reported (covered short selling has been allowed only since February 1, 2008).
Ireland
On September 18, 2008, the Irish Financial Regulator introduced new prohibitions on the short selling of shares in certain Irish publicly quoted banks.
Duration of the Prohibition
The prohibition went into effect at 12:01 AM on September 19, 2008, and will continue until further notice.
Covered Securities
The prohibition applies to public shares of Governor and Company of the Bank of Ireland, Allied Irish Banks Plc, Irish Life and Permanent Plc, and Anglo Irish Bank Corporation Plc.
Covered Transactions
The prohibition applies to “transactions or arrangements which have the effect of generating a net economic benefit which would arise from a fall in the price of the shares” of the banks listed above. These include spread bets, contracts for difference, and any other way in which an economic interest or benefit can be created. Short positions existing prior to the effectiveness of the new rules do not have to be closed out, but may not be increased, and may be subject to the disclosure obligation depending on the size of the economic interest involved (see below).
Covered Persons
The prohibitions do not apply to market makers or people who act as market makers (including, but not limited to, persons recognized as market makers by a “Market Operator” as defined in the Markets in Financial Instruments Directive).
Disclosure Requirements
Beginning on September 23, 2008, each person having an economic interest involving 0.25% or more of the issued share capital of the listed securities must disclose by 3:30 PM of each business day their identity,
the company whose shares are held, and the amount of the position.
Japan
No activity reported.
Luxembourg
The Luxembourg Commission de Surveillance du Secteur Financier (“CSSF”) issued a press release on September 19, 2008, announcing a ban on the naked short selling of the shares of credit institutions and insurance companies.
Duration of the Prohibition
The prohibition takes effect immediately and lasts until further notice.
Covered Securities
The prohibition applies to shares of credit institutions and insurance companies.
Covered Transactions
The prohibition applies to naked short selling of covered securities.
Covered Persons
The prohibition applies to all market participants, and intermediaries are required to verify client’s sales of the relevant securities are covered.
Disclosure Requirements
None.
Netherlands
The Dutch Authority for Financial Markets (“AFM”) and De Nederlandsche Bank N.V. (the Dutch Central Bank) (“DNB”) jointly announced on September 21, 2008, a ban on the naked short selling of shares and depository receipts on shares of financial companies.
Duration of the Prohibition
The ban took effect at 12:01 AM on September 22, 2008, and lasts until December 21, 2008.
Covered Securities
The ban applies to the securities of Aegon, Binck Bank, Fortis, ING, Kas Bank, SNS Reaal, Van der Moolen, and Van Lanschot.
Covered Transactions
The ban covers all selling of shares or depository receipts with delayed settlement or delivery on Euronext Amsterdam or transacted over-the counter. In addition, “a transaction or order or a combination of transactions or orders that in itself does not come under the above measures, but may bring about the same effect,” could also be seen as falling within the prohibition. Intra-day short positions are also covered by the ban.
Covered Persons
Market makers on the cash and derivatives markets (as defined in the Euronext Rulebook) and counterparties in block trade transactions are excepted from the ban. Euronext traders are asked to refrain from lending the relevant securities for transactions taking place after September 22.
Disclosure Requirements
Persons with a net economic short position of more than 0.25% of the capital of one of the financial companies listed “is requested to report these positions to AFM immediately,” but in no event later than the day
after acquiring the position. Short positions of multiple funds of discretionary fund managers must be aggregated in order to determine whether a disclosable position exists.
Portugal
On September 19, 2008, the Portuguese securities market regulator Comissão do Mercado de Valores Mobiliários (“CMVM”) announced a new instruction requiring the daily reporting of short selling activities. Specifically, members of Euronext Lisbon and the PEX Multilateral Trading Facility (“PEX”) are required to report their short selling activity of the previous day by 12:00 PM.
Duration of the Action
The instruction takes effect on September 22, 2008, and lasts until further notice. The first reporting day is September 23, 2008.
Covered Securities
The requirement applies to all securities “that are shares and securities that give the right to its acquisition, subscription or conversion.”
Covered Transactions
The requirement applies to all short sales executed on Euronext Lisbon or the PEX “where the seller does not have the ownership of the securities and those where the seller has acquired ownership through loans or other types of credit.”
Disclosure Requirements
The instruction requires separate reporting of securities sold short for client accounts and the member’s own accounts.
Singapore
No activity reported.
Spain
On September 22, 2008, the Spanish Comisión Nacional del Mercado de Valores (“CNMV”) announced temporary measures “aimed at reinforcing public information on short positions” that require disclosure of net short positions above certain levels in 20 listed issuers, most of which are banks. Naked short sales (i.e., sales of securities over which the seller does not have ownership or a binding loan commitment) are already prohibited.
Duration of the Requirement
The disclosure requirement goes into effect at 12:01 AM, September 24, 2008, and lasts “until market conditions that motivated [the measure] fade away and the CNMV so declares.”
Covered Securities
The new disclosure requirement applies to any financial instrument that gives economic exposure to downward price movements in the shares of issuers listed in the nnex to the September 22 release, which is subject to later modification.
Covered Transactions
The requirement applies any transactions in securities the net result of which is to give upside exposure to downward movements in price of the shares of the listed issuers. Once these Covered Transactions result in a net short position of 0.25% or more of the publicly traded stocks of the listed issuers, the net position must be disclosed to the CNMV by 7:00 PM of the day after the position was taken.
Switzerland
The Swiss Federal Banking Commission (“SFBC”) and the SWX Swiss Exchange (“SWX”) announced on September 19, 2008, that naked short selling is prohibited by SFBC’s Code of Conduct and SWX rules. In addition, SWX Europe, SWX’s UK subsidiary, announced on the same day that net short positions in certain Swiss and UK financial stocks are temporarily prohibited.
Duration of the Prohibition
SFBC’s and SWX’s announcements take effect immediately and last until further notice. SWX Europe’s prohibition lasts until December 19, 2008.
Covered Securities
SFBC and SWX prohibitions apply to all securities. SWX Europe’s prohibition only applies to the securities listed in its release.
Covered Transactions
The SFBC and SWX prohibitions apply to all sales in which “the relevant securities cannot be delivered punctually,” and do not apply to covered short sales, which remain permissible. SWX Europe prohibits the creation of net short positions in the shares of companies listed in Market Notice No. 31/2008.
Covered Persons
The prohibitions apply to all market participants.
Disclosure Requirements
None.
Taiwan
On September 21, 2008, the Taiwan Financial Supervisory Commission (“FSC”) announced a prohibition on the short selling of the shares of 150 issuers beginning on September 22, 2008. The prohibition applies when the relevant stocks are trading below the closing price of the previous trading session.
Duration of the Prohibition
The prohibition is in effect from September 22, 2008, through October 3, 2008, unless extended.
Covered Securities
The securities covered by the ban are the shares of the members of the Taiwan 50 Index, the Taiwan Mid-Cap 100, and the Taiwan Technology Index.
Covered Transactions
All short selling of the relevant securities is prohibited when they are trading below the closing price of the previous trading session.
Disclosure Requirements
None.
United Kingdom
The British Financial Services Authority (“FSA”) announced on September 18, 2008, the introduction of new provisions to the Code of Market Conduct to prohibit the “active” creation or increase of net short positions in publicly quoted financial companies.
Duration of the Prohibition
The prohibition became effective at 12:01 AM on September 19, 2008, and remains in effect until January 16, 2009, but will be reviewed 30 days after effectiveness.
Covered Securities
The prohibition applies to 32 UK-incorporated banks and insurers.
Covered Transactions
The prohibition applies to any transaction that has the effect of creating or increasing a net short position (including intra-day net short positions) in a listed UK financial sector company, with “net short position” being defined as a position “which gives rise to an economic exposure to the issued share capital of a company.” Any form of economic interest is considered in determining whether a person has a “net short position” in one of the listed companies.
Covered Persons
The prohibitions do not apply to market makers.
Disclosure Requirements
A net short position which represents an economic interest of 0.25% or more of the issued share capital of a listed company as of September 19, 2008, must be disclosed via a Regulatory Information Service (“RIS”) announcement by 3:30 PM on September 23, 2008, and every business day thereafter as long as the net short position above the indicated percentage lasts. This includes positions acquired before September 18, 2008.
The update was authored by Jane A. Kanter (+1 202 261 3302; jane.kanter@dechert.com), Christopher D. Carlson (+1 202 261 3320; christopher.carlson@dechert.com), and Karl J. Paulson Egbert (+1 202 261 3499; karl.egbert@dechert.com).
