The Financial Services and Markets Authority (FSMA) has decided to modify the rules on short selling of shares in Belgian financial institutions, effective 13 February 2012, by replacing the interim ban on the holding of net short positions with a reporting obligation for substantial net short positions and a locate rule.
Background
On 19 September 2008, Belgium's financial regulatory authority (the former CBFA) issued a ban on the naked short selling of securities in financial institutions traded on Euronext Brussels, effective 22 September 2008. The ban was confirmed by a Royal Decree of 23 September 2008, adopted on the basis of Article 25 §1(5) of the Act of 2 August 2002 on the supervision of the financial sector and financial services (the "Act of 2 August 2002"). The ban was initially intended to remain in effect for a period of 3 months but was subsequently extended several times, until the Royal Decree of 22 September 2009 extended it indefinitely. This measure was introduced in light of exceptional market circumstances and after consultation with the foreign supervisory authorities responsible for overseeing Euronext.
On 12 August 2011, several European countries imposed an additional ban on net short positions in their respective financials. In Belgium, the FSMA followed suit and adjusted its clarification of the Royal Decree of 23 September 2008 to prohibit transactions that create (or increase) a net short position in Belgian financials in an investor's portfolio.
At the European level, a proposal for a Regulation of the European Parliament and of the Council on Short Selling and certain aspects of Credit Default Swaps[1] was formally adopted by the European Parliament on 15 November 2011 and by the Council on 21 February 2012. This regulation, which has not yet been published in the Official Journal, should enter into force on 1 November 2012. It is based on the so-called locate rule, pursuant to which investors who sell shares without possessing or having borrowed them must make certain arrangements to reasonably ensure that the shares sold can be delivered in a timely manner.
In light of improved market conditions, however, the competent authorities in countries that have adopted similar measures are assessing whether the ban can be lifted. France’s ban, for instance, expired on 11 February 2012.[2]
On 13 February 2012, the FSMA issued a press release clarifying the rules (specifically the concept of coverage). The new rules entered into effect that same day. In reaching its decision, the FSMA took into account, amongst other factors, the lower market volatility and the need for a consistent approach in the Euronext zone.
Spain followed suit on 15 February 2012,[3] and Italy did not renew its ban on 24 February 2012.
Together with other European securities regulators, the FSMA will continue to monitor market conditions and take the necessary actions with respect to the short selling rules.
Scope
The original ban related to securities with voting rights issued by financial institutions traded on Euronext Brussels. On 22 September 2008, the CBFA specified that the ban concerned only stock and derivatives (including futures) of the following financial institutions: Dexia SA, Ageas NV/SA (formerly Fortis NV/SA), KBC Group NV, KBC Ancora CVA and ING Group NV. The Royal Decree of 22 September 2009 removed ING from the list, as this financial institution was already covered by measures taken by the Dutch financial regulator.[4]
Thus, the measures in effect only concern financial instruments issued by Dexia SA, Ageas NV/SA, KBC Group NV and KBC Ancora CVA (hereinafter the "relevant financial institutions").
Measures
The measures currently in force consist of (i) a prohibition on naked short selling of securities issued by the relevant financial institutions and (ii) an obligation to notify and disclose net short positions in securities of any of the relevant financial institutions.
Prohibition on naked short selling
The naked short selling (i.e. selling assets without appropriate coverage) of shares of the relevant financial institutions is prohibited. A sale transaction shall be deemed appropriately covered when the investor:
- owned or borrowed the relevant shares before selling them;
- previously entered into securities lending arrangements, on the basis of which the relevant shares will be delivered in time to settle the sell transactions when due;
- has concluded an arrangement with a third party, pursuant to which that third party has confirmed that the relevant shares have been located and has taken measures vis-à-vis other third parties to ensure the investor a reasonable expectation of settlement when due.
Qualified intermediaries are obliged to take reasonable measures to ascertain that their clients have appropriate coverage for their proposed transactions. They must make their clients aware of the applicable measures and take reasonable measures to comply with them. For clients with direct market access, intermediaries should at least obtain a general representation regarding their coverage.
A transaction or order, or a combination of transactions or orders, that in itself does not fall under the abovementioned measures but may bring about the same effect is also deemed to fall under the (market abuse) prohibition in Article 25 of the Act of 2 August 2002.
Notification and disclosure obligations
Any person that holds a net short position representing an economic interest in excess of 0.25% of the capital of any of the relevant financial institutions must disclose this to the market through an internationally distributed press release and notify the same to the FSMA.
As long as the net short position exceeds the 0.25% threshold, any changes of 0.01% or more must be disclosed to the market and notified to the FSMA. If the net short position falls below the 0.25% threshold, a final disclosure and notification are required.
For the purposes of these rules, investors must take into account all financial instruments that result in exposure, whether direct or indirect, to the equity of the relevant financial institution. Fixed income instruments or instruments that give exposure to the creditworthiness of any of the relevant financial institutions (such as CDS) should not be taken into account. On the other hand, positions stemming from the following transactions, amongst others, must be considered:
- purchases or sales of shares, ADRs and similar certificates representing shares, convertible bonds, and warrants;
- transactions on options, swaps, futures, contracts for difference (CFD), and turbos;
- baskets of financial instruments, ETFs or indices that, at least in part, contain shares of the relevant financial institutions.
As regards securities lending transactions, lent shares are included in the calculation of the lender's long position, while the borrower cannot include borrowed shares in its long position.
Entities such as asset managers and UCITS that manage several separate portfolios pursuing distinct and autonomous trading strategies must assess compliance for each individual portfolio. Distinct portfolios may only be consolidated, for the purposes of these rules, if they are consistently managed in a coordinated manner and the investment decisions are taken by the same entity.
Exemptions
The restrictions on naked short selling and the disclosure and reporting requirements do not apply to financial intermediaries (licensed banks and investment companies):
- that are usually active as market makers or liquidity providers (as defined by the Euronext Rule Book) on regulated markets, MTFs or OTC markets (cash or derivatives markets);
- that sell blocks to their clients without having the securities at hand (block trade counterparties).
Proprietary trading strategies are not exempt. Clients of market makers and liquidity providers are subject to the measures. If a client wishes to sell a block to its intermediary, the latter must ascertain that the client has appropriate coverage.
Sanctions
The FSMA can impose sanctions in the event of non-compliance with the above measures (Article 36 of the Act of 2 August 2002).
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[1] COM(2010)482 final of 15 September 2010; see the press release of the Council of the European Union of 21 February 2012 (http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ecofin/128081.pdf).
[2] Autorité des Marchés Financiers (AMF), press release of 13 February 2012.
[3] Comisión Nacional del Mercado de Valores (CNMV), press release of 15 February 2012.
[4] Autoriteit Financiële Markten (AFM), http://www.afm.nl/nl/professionals/afm-voor/effectenuitgevende-ondernemingen/marktmisbruik/maatregel-short-selling.aspx
