Proposed Amendments to the EU Short Selling Regulation

The European Securities and Markets Authority is consulting on proposed amendments to the EU Short Selling Regulation. ESMA is reviewing the SSR provisions following two occurrences of market volatility. The first is the market reactions to the impact of the COVID-19 pandemic and the related regulatory response where numerous and varied short sale bans were imposed by various EU member states. The second is the market turmoil in the U.S. markets and elsewhere for so-called meme stocks, such as Gamestop. Responses to the consultation may be submitted by November 19, 2021, and ESMA is expected to publish its report to the European Commission early in 2022.

ESMA's key proposals include:
 

1. Amendments aimed at improving the provisions on the emergency measures—long- and short-term bans and ESMA's powers to issue emergency measures. ESMA's analysis of the bans imposed in 2020 shows that they reduced volatility in the shares; however, they also lead to less market liquidity. ESMA's view is that allowing regulators to address the risks of financial instability is correct; however, there are operational improvements to the SSR provisions that would improve the overall regime. Some of the proposals include:
   1. excluding indices, baskets and ETFs from the scope of long-term bans;
   2. aligning ESMA's intervention powers with those of the national regulators so that the powers may only be used when the same conditions are met; and
   3. amending the procedures for issuing short-term short sale bans.
2. Changes to the framework for the calculation of net short positions, the locate rule and the list of exempted shares. ESMA's proposals include:
   1. requiring subscription rights to be included in the calculation of net short positions;
   2. strengthening the requirements for the locate rule. The SSR bans the naked short sale of shares and requires short sellers to ensure that they have the securities that they want to short sell available for settlement. One of the methods available is for a short seller to enter into an arrangement with a third party to locate the shares and have a reasonable expectation that the shares will be available for settlement. ESMA makes several proposals for enhancing the relevant provisions on the locate rule; and
   3. limiting the exemptions for shares admitted to trading on an EU trading venue where the principal trading venue for the shares is in a third country. ESMA is proposing that the exemptions should not be available where a significant percentage of trading takes place within the EU, suggesting a 40% threshold.
3. Proposals on the transparency framework and disclosure of net short positions. The SSR has two net short position thresholds. The first requires holders of net short positions in issued share capital of 0.2%, and each 0.1% above that, to notify the relevant national regulator—the notification threshold. Positions of 0.5%, and each 0.1% above that, must be publicly disclosed—the disclosure threshold.

Effective March 16, 2020, ESMA temporarily changed the notification threshold from 0.2% to 0.1%, requiring all holders of net short positions in shares traded on an EU regulated market to notify the relevant national regulators if the position reached or exceeds 0.1% of the issued share capital, and each 0.1% above that. The threshold has since reverted to 0.2%; however, ESMA issued an opinion in May 2021 in which it makes a recommendation to the European Commission that the threshold be lowered permanently to 0.1%.

ESMA is not proposing to amend the disclosure threshold; however, it would like feedback from market participants as to whether the threshold is appropriate. ESMA is proposing the establishment of a new framework for the publication of aggregated net short positions per issuer by a centralized notification and publication system.

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