The European Securities and Markets Authority has provided more details of new EU short-selling regulations that take effect in November. The clarification comes in the form of a Q&A document published on Esma’s website.

Under the new regulations due to be enforced from November 1, participants in short selling – the act of borrowing securities, selling them on and seeking to buy them back at a lower price to make a profit – will need to notify authorities when they intend to short sell 0.2% or more of the shares of a company that are available to the market. They will also be required to publicly reveal net short positions of more than 0.5% of the company.

Industry experts have expressed fears that the new regulation could dampen securities lending activity. They are concerned that the pressure on borrowers to reveal their short positions could deter them from trading.

Esma’s Q&A document provides answers to five main concerns expressed by short-selling participants, including which shares are covered by the regulations and when notifications need to be made. Here are the watchdog’s answers:

Question: Do shares of all companies traded on markets in the EU fall under the net short position notification and disclosure requirements?

Esma said this depends on two conditions: whether the shares are traded on a venue in the EU; and whether the principal trading venue for the share is in the EU. For example, shares of a company based in the US which are traded on a German venue, but whose principal trading venue is the US, are exempt from the requirements.

Question: Do notifications have to be made by a certain time from November 1?

Esma said net short positions should be notified no later than 3.30pm on the following day, so the first notifications would need to be made before 3.30 pm on November 2. In member states where November 1 is not a trading day, for example Hungary, notifications would need to be made no later than 3.30pm on the day following the first trading date.

Question: How do we submit the notification or disclosure?

The reporting channels for each authority will be specified on their respective websites. Esma will publish links to the relevant pages. Reporting channels will include fax, electronic systems and web-based solutions.

Question: Should dividends in the form of shares that are subject to a lending agreement – which must be returned by a borrower – be taken into account when calculating short positions?

Esma said no. It said: “Those shares which the lender is entitled to receive under the terms of a stock lending agreement...and that must be reimbursed by the borrower shall not be included...in calculating the net short position.”

Question: What if I’m late submitting my short positions to the authorities?

Esma said a disclosure made after the 3.30pm deadline will be published as soon as possible. However, late disclosures will breach the regulations, and be subject to penalties laid down by the relevant authority.

http://www.efinancialnews.com/story/2012-09-14/esma-short-selling-hedge-funds