Common EU rules on short selling as of 1 November 2012

Date 8 okt. 2012
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The European Parliament and the Council have adopted a common set of rules regulating short selling (Regulation 236/2012 – on short selling and certain aspects of credit default swaps). The regulation becomes effective 1 November 2012 and is complemented by technical standards drafted by the ESMA (ESMA/2012/263 – final report of the 19th of April 2012).


The financial Instruments covered

The Regulation applies to the following financial instruments:

  • Securities
  • Money Market instruments
  • Shares in undertakings for collective investment
  • Derivative agreements
  • Financial contracts for difference
  • Debt instruments issued by a member state or by the European Union 


Imposition of a total Ban on ”naked shorts”

The regulation imposes a total ban on the so-called ”naked short”. This implies that short selling is henceforward only allowed if (i) the shares are borrowed in advance, (ii) there is a binding contract on borrowing shares in the future beforehand or, (iii) there is a contract with a third party in accordance to the localisation rule; read more about this immediately below.


The localisation Rule

In order to better ensure that clearing and settlement takes place on time, the localisation rule has been established. The requirements for contracting with a third party in accordance with the localisation rule are met if the two following conditions are fulfilled:

  • the broker has confirmed that the shares are localized, and
  • clearing and settlement may reasonably be expected to take place at the agreed time.

The localisation rule may be applied in three different ways. Firstly, by a broker having localised the shares and that he, as a minimum, has reserved them. The second way is used on day trading, in which case it must be stated that the intention is day trading. Subsequently, the broker has two options. Either the broker must confirm that the  shares are easy to borrow or purchase on the market, or alternatively, the number of shares in question must be set aside. The third way is used on liquid shares, in which case the broker must confirm that the shares are easy to borrow or purchase on the market or that the broker has set them aside. The securities dealer is obliged to monitor the market. If it turns out that he is in risk of not being able to purchase or borrow the shares, he must instruct the broker to purchase or borrow the necessary amount of shares, thereby ensuring timely clearing and settlement.


The broker must be a separate legal entity from the securities dealer. In addition, the broker must be able to prove his participation in the control of the loan and purchase of shares, his ability to provide the shares as well as a statistical proof thereof.


The Rules regarding covering Purchases and daily Penalties

In case of a person or a legal person being unable to provide the shares in question within four banking days after the settlement becomes due, procedures for covering purchases have been established. According to these procedures, the securities dealer is obliged to cover the stock lender’s loss and in addition pay an amount to the stock lender. Furthermore, the securities dealer is obliged to pay daily penalties until delivery.


New Disclosure Requirements

Legal and individual persons with a short net position in the issued share capital must notify the Financial Supervisory Authority when the position in question reaches or falls below a percentage corresponding to 0.2% of the issued share capital and every time it increases by 0.1% above such percentage. Additionally, short positions in shares comprising 0.5% of the issued share capital in the company in question and every additional0.1% above such percentage must be announced. The announcement to the market must be carried out via the homepage of the Financial Supervisory Authority, which must simultaneously provide access to historical data.


Market Makers may be exempted from these new Rules

The new regulation provides an option for market markers to avoid the imposition of the requirements on their market making activities which may result in serious restriction of their function and their ability to create liquidity. This implies, inter alia, that market makers have the option of not being ordered report to the Financial Supervisory Authority on and making public significant short positions in shares and state bonds.

If the market makers wish to be exempted from the new rules, it is required that the Financial Supervisory Authority has received notification thereof no later than 30 days before the exemption is expected to be used. Based on the submitted information, the Financial Supervisory Authority must additionally be able to identify which instruments the exemption encompasses. Furthermore, the market makers must state whether any short positions in the concerned instruments are expected to be kept within the fixed thresholds, which, without the exemption, would have triggered a disclosure requirement and possibly a public announcement. It has been possible to submit notifications concerning exemption from the new rules to the Financial Supervisory Authority since the 3th of September 2012.



If you have any questions or require additional information on above, please contact Partner David Moalem (, Senior Associate Christian R. J. Nielsen ( or Junior Associate Mette Wigand Bode (


The above does not constitute legal counselling and Moalem Weitemeyer Bendtsen does not warrant the accuracy of the information. With the above text, Moalem Weitemeyer Bendtsen has not assumed responsibility of any kind as a consequence of a reader’s use of the above as a basis for decisions or considerations.