Securities Financing [EU]

Table of Contents

Short selling of securities

Regulation (EU) No 236/2012 on short selling and certain aspects of credit default swaps

It seeks to regulate certain aspects of short selling* and credit default swaps (CDS)* in the European Union.
It introduces:
uniform transparency requirements for investment managers; and
new powers for financial regulators in EU countries and for the European Securities and Markets Authority (ESMA) to use in exceptional circumstances* where there is a serious threat to financial stability.

Key Points

The regulation:

covers all types of financial instruments, in particular shares listed in the EU, derivatives and sovereign debt securities (loans issued by governments);
lays down strict rules on short selling and certain aspects of CDS in proportion to the risks associated with them, including:
measures to prevent ‘naked’ short selling* of shares and loans issued by governments,
a ban on ‘naked’ CDS transactions (including on sovereign debt);
sets disclosure requirements — investment managers have to disclose certain short-selling transactions to the competent authorities — whereas larger transactions, above a certain threshold, must be publicly disclosed to the markets;
gives, in periods of exceptional financial instability in an EU country or in the EU as a whole, the competent authorities temporary powers to require greater transparency or to impose restrictions on short-selling and CDS transactions;
gives ESMA:
a key coordination role to ensure consistency between national competent authorities and to ensure that any measures taken are necessary and proportionate,
the power to take measures where the situation has cross-border implications.

Implementing and delegated acts

Implementing Regulation (EU) No 827/2012 lays down technical standards regarding:
the means for public disclosure of net position in shares;
the format of the information to be provided to ESMA in relation to net short positions;
the types of agreements, arrangements and measures to adequately ensure that shares or sovereign debt instruments are available for settlement; and
the dates and period for the determination of the principal venue for a share.

Delegated Regulation (EU) No 826/2012 supplements Regulation (EU) No 236/2012 regarding:
technical standards on notification and disclosure requirements with regard to net short positions;
the details of the information to be provided to ESMA in relation to net short positions; and
the method for calculating turnover to determine exempted shares.

Delegated Regulation (EU) No 918/2012 supplements Regulation (EU) No 236/2012 regarding:
definitions;
calculating net short positions, covered sovereign CDS, notification thresholds, liquidity thresholds for suspending restrictions, significant falls in the value of financial instruments and adverse events.

Delegated Regulation (EU) No 919/2012 supplements Regulation (EU) No 236/2012 regarding technical standards for calculating the fall in value for liquid shares and other financial instruments.
COVID-19 pandemic — ESMA decisions

On 16 March 2020, following the outbreak of the COVID-19 pandemic and given the resulting serious threat to market confidence in the EU, ESMA issued a decision (Decision (EU) 2020/525 — ESMA) temporarily requiring the holders of net short positions in shares traded on an EU-regulated market to notify the relevant national competent authority if the position reaches or exceeds 0.1% of the issued share capital after the entry into force of the decision. This decision was valid for 3 months.
On 10 June 2020, Decision (EU) 2020/1123 — ESMA was adopted to extend the original decision by 3 months until 17 September 2020.
On 16 September 2020, a further decision was taken, extending the previous one until 18 December 2020.
On 16 December 2020, a further decision was taken. It applies as of 19th December and extends the previous decision for a period of three months until 19 March 2021.

Context

It has applied since 1 November 2012.

In times of financial instability, certain financial transactions such as short selling and CDS bear the risk of aggravating any downward spiral in the prices of shares, especially in financial institutions, threatening their viability and creating risks to the whole financial system. Such instability in the financial markets can spill over into the real economy.

For more information, see:

Short selling (European Commission)
Short selling (ESMA)
ESMA renews its decision requiring net short position holders to report positions of 0.1% and above — press release (ESMA).

KEY TERMS
Short selling: a transaction in which a financial institution sells a financial product it has borrowed, with the aim of buying it back later. The institution hopes that in the meantime the price of the product will have fallen, so it has to pay less than the price it obtained from the sale.
Credit default swaps (CDS): highly risky, unregulated derivatives.
Exceptional circumstances: in the context of this regulation:
there are adverse events or developments that constitute a serious threat to financial stability or to market confidence in the EU country concerned or in one or more other EU countries; and
the measure is necessary to address the threat and it will not have a detrimental effect on the efficiency of financial markets, which is disproportionate to its benefits.
Naked short selling: perceived as riskier than normal short selling — when the seller has not even borrowed the financial product in the first place.

MAIN DOCUMENT

Regulation (EU) No 236/2012 of the European Parliament and of the Council of 14 March 2012 on short selling and certain aspects of credit default swaps (OJ L 86, 24.3.2012, pp. 1-24)

Successive amendments to Regulation (EU) No 236/2012 have been incorporated in the original text. This consolidated version is of documentary value only.

RELATED DOCUMENTS
European Securities and Markets Authority Decision (EU) 2020/525 of 16 March 2020 to require natural or legal persons who have net short positions to temporarily lower the notification thresholds of net short positions in relation to the issued shares capital of companies whose shares are admitted to trading on a regulated market above a certain threshold to notify the competent authorties in accordance with point (a) of Article 28(1) of Regulation (EU) No 236/2012 of the European Parliament and of the Council (OJ L 116, 15.4.2020, pp. 5-13)

Regulation (EU) 2016/1033 of the European Parliament and of the Council of 23 June 2016 amending Regulation (EU) No 600/2014 on markets in financial instruments, Regulation (EU) No 596/2014 on market abuse and Regulation (EU) No 909/2014 on improving securities settlement in the European Union and on central securities depositories (OJ L 175, 30.6.2016, pp. 1-7)

Commission Delegated Regulation (EU) No 918/2012 of 5 July 2012 supplementing Regulation (EU) No 236/2012 of the European Parliament and of the Council on short selling and certain aspects of credit default swaps with regard to definitions, the calculation of net short positions, covered sovereign credit default swaps, notification thresholds, liquidity thresholds for suspending restrictions, significant falls in the value of financial instruments and adverse events (OJ L 274, 9.10.2012, pp. 1-15)

Commission Delegated Regulation (EU) No 919/2012 of 5 July 2012 supplementing Regulation (EU) No 236/2012 of the European Parliament and of the Council on short selling and certain aspects of credit default swaps with regard to regulatory technical standards for the method of calculation of the fall in value for liquid shares and other financial instruments (OJ L 274, 9.10.2012, pp. 16-17)

Commission Implementing Regulation (EU) No 827/2012 of 29 June 2012 laying down implementing technical standards with regard to the means for public disclosure of net position in shares, the format of the information to be provided to the European Securities and Markets Authority in relation to net short positions, the types of agreements, arrangements and measures to adequately ensure that shares or sovereign debt instruments are available for settlement and the dates and period for the determination of the principal venue for a share according to Regulation (EU) No 236/2012 of the European Parliament and of the Council on short selling and certain aspects of credit default swaps (OJ L 251, 18.9.2012, pp. 11-18)

Commission Delegated Regulation (EU) No 826/2012 of 29 June 2012 supplementing Regulation (EU) No 236/2012 of the European Parliament and of the Council with regard to regulatory technical standards on notification and disclosure requirements with regard to net short positions, the details of the information to be provided to the European Securities and Markets Authority in relation to net short positions and the method for calculating turnover to determine exempted shares (OJ L 251, 18.9.2012, pp. 1-10)

Transparent securities financing transactions

Regulation (EU) 2015/2365 on transparency of securities financing transactions and of reuse

It increases the transparency of certain activities in financial markets, such as the use of securities financing transactions (SFTs)* and of collateral* reuse*, so that they can be monitored and the risks identified.

The regulation establishes EU rules for the reporting of details of SFTs to trade repositories, for information on SFTs and total return swaps* to be disclosed to investors in collective investment companies, and for minimum transparency conditions to be met by the parties involved in collateral reuse.

Reporting

Counterparties to SFTs have to report the details of any SFT they have concluded, as well as any modification or termination, to a central database (‘trade repository’) registered with the European Securities and Markets Authority (ESMA) or recognised in accordance with this regulation.
Those details must be reported no later than the working day following the conclusion, modification or termination of the transaction.

Counterparties must keep records of all SFTs that they have concluded, modified or terminated for at least 5 years following the termination of the transaction.
In this respect, ESMA must develop:

draft regulatory technical standards specifying the details of the reports for the different types of SFTs;
draft implementing technical standards specifying the format and frequency of the reports for the different types of SFTs.

These technical standards are subsequently scrutinised and adopted by the European Commission as delegated regulations or implementing regulations.

Transparency for investors

Managers of collective investment companies should include detailed information on their use of SFTs and total return swaps in regular reports so that investors are aware of the risks associated with their use.
A collective investment company’s investment policy with respect to SFTs and total return swaps should be clearly disclosed in the pre-contractual documents.

Transparency of reuse

To increase transparency on the extent of reuse of financial instruments provided as collateral, in particular regarding the respective risks and consequences, for example in the case of bankruptcy, the regulation imposes minimum information requirements.

Reuse should take place only under the following conditions:
the prior consent of the providing counterparty to a security collateral arrangement, or the express agreement to provide collateral by way of a title transfer; and
the transfer of the collateral from the account of the providing counterparty.

Cooperation between competent authorities

Competent national authorities and ESMA must cooperate closely and exchange information, in particular in to identify and remedy infringements of this regulation. The entities that have access to data stored in trade repositories (e.g. supervisory authorities) and the relevant members of the European System of Central Banks must also cooperate closely in accordance with certain conditions.
A competent authority may refuse to act on a request to cooperate and exchange information, in exceptional circumstances.

Professional secrecy

Any confidential information received, exchanged or transmitted pursuant to this regulation is subject to the conditions of professional secrecy.

Relationship with non-EU countries

The regulation grants the Commission the power to assess the rules of non-EU countries for the purposes of recognising trade repositories in non-EU countries, and in order to avoid potentially duplicate or conflicting requirements.
A trade repository established in a non-EU country may provide services to entities in the Union only after recognition by ESMA. ESMA must publish on its website a list of the trade repositories recognised in accordance with this regulation.

Sanctions

EU countries must ensure that competent authorities have the power to impose administrative sanctions and other administrative measures which are effective, proportionate and dissuasive.

Certain essential requirements apply in relation to the:

criteria to be taken into account when applying a sanction or measure;
publication of sanctions or measures;
nature and types of sanctions and measures;
levels of administrative monetary sanctions.

Delegated acts

The Commission has adopted a series of delegated acts supplementing or amending the regulation. These regulations supplement Regulation (EU) 2015/2365 with regard to regulatory technical standards:

specifying the details of SFTs to be reported to trade repositories;
on access to details of SFTs held in trade repositories;
on the collection, verification, aggregation, comparison and publication of data on SFTs by trade repositories; and
specifying the details of the application for registration and extension of registration as a trade repository.

Further delegated regulations concern:

the fees charged by the European Securities and Markets Authority to trade repositories; and
an amendment to the list of exempted entities (concerns UK (1) entities in the event of Brexit).

Implementing acts

The Commission has also adopted 3 implementing acts:

Regulation (EU) 2019/363 lays down technical standards for the format and frequency of reports on the details of securities financing transactions to trade repositories. It also amends Regulation (EU) No 1247/2012 with regard to the use of reporting codes in the reporting of derivative contracts;
Regulation (EU) 2019/364 lays down technical standards for the format of applications for registration and extension of registration of trade repositories;
Regulation (EU) 2019/365 lays down implementing technical standards for the procedures and forms for exchange of information on sanctions, measures and investigations.
Progress

Within 36 months of the entry into force of the regulatory technical standards that it adopts, the Commission must submit a report to the European Parliament and to the Council. This report will cover the effectiveness, efficiency and proportionality of the obligations laid down in this regulation and may be accompanied by appropriate proposals.

The Commission also submitted a report on progress in international efforts to mitigate the risks associated with SFTs on 19 October 2017.

Context

The regulation applies from 12 January 2016 but establishes the following phased-in implementation process:

Reporting to trade repositories: depending on the type of entity (e.g. bank, investment firm, central counterparty), reporting to trade repositories will start at different stages 12 to 21 months after the entry into force of the regulatory technical standards mentioned above.

Funds disclosure requirements in periodic reports apply since 13 January 2017. As regards pre-contractual documents, investment funds constituted before 12 January 2016 have had to disclose the use of SFTs and total return swaps in the pre-contractual documents since 13 July 2017, while funds constituted more recently had to do it as from 12 January 2016.

Transparency rules on collateral reuse: the reuse rules have applied since 13 July 2016.
The delegated and implementing regulations have applied since 11 April 2019. The delegated regulation relating to UK (1) entities will apply when the main regulation ceases to apply in the UK (1) following Brexit.

For more information, see:

Regulation on security financing transactions (European Commission).
KEY TERMS

Securities financing transaction: this can refer to a number of transactions including:
a repurchase transaction (when a party sells a security, i.e. a financial asset such as a share or a government bond, and agrees to repurchase it in the future repaying the original sum of money plus a return for the use of that money);
a case where the lending counterparty lends securities for a fee in return for a guarantee in the form of financial instruments or cash given by their clients or counterparties;
a buy-sell back transaction or sell-buy back transaction; and
a margin lending transaction (e.g. where a counterparty extends credit in connection with the purchase, sale, carrying or trading of securities but the transactions do not include other loans that are secured by collateral in the form of securities).
Collateral: the provision of assets (e.g. securities) by a borrower to a lender to secure the performance of an obligation by:
transfer of full ownership from a collateral provider to a collateral taker (title transfer); or by
transfer of possession from a collateral provider to a collateral taker under a security right where the full ownership of the assets remains with the collateral provider (security collateral arrangement).
Reuse: the use by a receiving counterparty, in its own name and on its own account or on the account of another counterparty, of financial instruments received under a collateral arrangement.
Total return swap: a financial contract that transfers both the credit risk (e.g. a borrower’s ability to repay a loan) and market risk of an underlying asset (i.e. the financial instrument, such as a share or commodity, on which the price of a derivative is based).

MAIN DOCUMENT

Regulation (EU) 2015/2365 of the European Parliament and of the Council of 25 November 2015 on transparency of securities financing transactions and of reuse and amending Regulation (EU) No 648/2012 (OJ L 337, 23.12.2015, pp. 1-34)

Securities Financing [EU]

Short selling of securities

Key Points

Implementing and delegated acts

MAIN DOCUMENT

Transparent securities financing transactions

Reporting

Transparency for investors

Transparency of reuse

Cooperation between competent authorities

Professional secrecy

Sanctions

Delegated acts

Context

MAIN DOCUMENT

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