Short-selling (also known as “shorting” or “going short”) is the practice of selling assets, usually shares, that have been borrowed from a third party with the intention of buying identical assets back at a later date to return to the lender. The short-seller hopes to profit from a decline in the value of the assets between the sale and the repurchase, as he will pay less to buy the assets than he received on selling them.
After the turmoil experienced on financial markets across the globe last autumn, many financial regulators across the EU have taken emergency measures to restrict and/or impose conditions on short-selling. For example, in Ireland, the Financial Regulator on 23 September 2008 prohibited short-selling in the shares of the major quoted Irish banks.
As a result of the measures introduced by separate regulators, the Committee of European Securities Regulators (“CESR”) earlier this year launched a review of policy on short-selling with the aim of formulating pan-European standards in the area. The initiative reflected concerns that had been raised regarding the burden for market participants of having to comply with a number of different sets of national requirements.
During the summer, CESR issued a consultation paper setting out its proposals for a pan-European short-selling disclosure regime. The proposals contemplate a two-tier system for the disclosure of short-positions held in shares admitted to trading on regulated markets in the EU – in Ireland, this would capture shares traded on the main list of the Irish Stock Exchange, but not on the Irish Enterprise Exchange.
It is proposed that when a short-seller reaches a 0.10% short-position in a particular stock, it will be required to make a private disclosure to the relevant regulator. Further private disclosures would then be required at specified subsequent increments. CESR proposes that public disclosures would then be required on a short-position of 0.50%.
These thresholds may appear low in comparison to the EU’s Transparency Regime which, in Ireland, requires disclosure of holdings of voting rights attaching to shares in plcs at 3% and above. However, according to CESR, a short-selling disclosure regime is intended to mitigate the risks posed by short-selling to orderly markets and/or market abuse. The Transparency Regime, on the other hand, seeks to enhance transparency regarding who controls a company.
CESR is currently gathering responses from interested parties to its consultation paper. After considering the responses, CESR plans to publish a final paper by the end of 2009.
