EUROPEAN UNION: ESMA Updates Short Selling Q&A

Tuesday February 6 2018

On 5^th February 2018, the European Securities and Markets Authority (ESMA) updated its Questions & Answers (Q&A) document regarding the implementation of the Short Selling Regulation (SSR). The purpose of the Q&A document is to promote common supervisory approaches and practices in the application of SSR.

The Q&A  include an update of the Q&A on uncovered short sales further specifying cases in which rights to subscribe for new shares cannot be used to cover a short sale. The SSR is intended to reduce, inter alia, settlement risks and other risks linked with uncovered or naked short selling carried out by investors.

Q10.6 Can claims to as yet unissued shares (subscription rights, convertible bonds) cover a short sale?

A10.6 Claims to as yet unissued shares (subscription rights, convertible bonds) may only cover a short sale if the availability of the new shares for settlement by the arrangement is ensured when settlement is due e.g. the concerned rights or convertible bonds can be converted into shares that would be available in time for ensuring the settlement.

Rights to subscribe for new shares cannot be used to cover a short sale in accordance with Article 5(1)(e) of Commission Implementing Regulation (EU) No 827/2012 where, at the time of entering into the short sale, there is uncertainty as to whether the new shares subscribed for will be available for settlement in due time.

That would be the case at least where:

1. taking into account that the procedure for capital increase may vary in the Member States, the successful conclusion of the capital increase is not yet known and certain as it would be where the capital increase is subject to conditions (e.g. minimum level of subscriptions);
2. it is not certain that the new shares resulting from the capital increase are fungible with the existing shares sold short;
3. there is uncertainty as to whether a sufficient number of new shares will be allocated to the subscriber that undertakes the short sale of the existing shares;
4. the delivery of the new shares in accordance with the applicable national law in the context of the concerned capital increase cannot be effective before or on the date of settlement of the short sale of the existing shares.

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