EN    EN EN 
EN    EN  EUROPEAN COMMISSION 
Brussels, 15.9.2010 
SEC(2010) 1055 
  
COMMISSION STAFF WORKING DOCUMENT 
IMPACT ASSESSMENT  
 
 
Accompanying document to the 
  
Proposal for a  
 
REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL 
 
on Short Selling and certain aspects of Credit Default Swaps 
  
{COM(2010) 482 final} 
{SEC(2010) 1056} 
EN 1-2   EN TABLE OF CONTENTS 
1. Introduction ................................................................................................................ ............ 5 
2. Procedural issues and consulta tion of interested parties.............................................. 7 
2.1. CESR and ESME reports ............................................................................................. 7 2.2. Public consultation....................................................................................................... 8 
2.3. Steering Group ............................................................................................................ .8  
2.4. Impact Assessment Board............................................................................................ 9 3. Policy context, Problem Definition, Ba seline scenario and Subsidiarity................... 10 
3.1. Background and context............................................................................................. 10 3.1.1 Who short sells, what and why .................................................................................. 10 3.1.2 Trades in Credit Default Swaps ................................................................................. 14 3.1.3 Economic benefits of short selling and CDS ............................................................. 15 3.1.4 Stakeholders concerned by short selling and CDS transactions ................................ 17 
3.1.5 Overview of current regulatory  landscape and how it may evolve............................ 17 
3.2. Problem definition...................................................................................................... 20  
3.2.1. Other related issues outside of the scope of this initiative......................................... 22 
3.3. Problem 1: Risk of ne gative price spirals .................................................................. 24 
3.4. Problem 2: Risk of settlement failure associated with nake d short selling................ 26 
3.5. Problem 3: Transparency deficiencies ....................................................................... 28 3.6. Problem 4: Increased compliance costs a nd potential regulatory  arbitrage arising 
from a fragmented regulatory framework.................................................................. 30 
3.7. How would the problem e volve without EU action? The Baseline Scenario............ 32 
3.8. Subsidiarity .............................................................................................................. .. 34 
4. Objectives.................................................................................................................. . 34 
4.1. General, specific and operational ob jectives.............................................................. 34 
4.2. Consistency of the objectives  with other EU policies................................................ 37 
5. Policy options............................................................................................................. 3 7 
5.1. Policy options to ensure regulators have the power to restrict or ban short selling or 
CDS in distressed markets ......................................................................................... 37 
5.2. Policy options to ensure certain requirement s at the point of trading and strengthen 
settlement discipline................................................................................................... 38 
EN 1-3   EN 5.3. Policy options to ensure regulators a nd markets obtain data on short positions 
(including through CDS)............................................................................................ 38 
5.4. Policy options to ensure a coordinated res ponse by EU member states to short selling 
and CDS ..................................................................................................................... 39 
6. Analysis of impacts and choice of pr eferred options and instruments....................... 39 
6.1. Analysis of impacts of policy options........................................................................ 39 6.1.1. Policy options to ensure regulators have the power to restrict or ban short selling or 
CDS in distressed markets ......................................................................................... 39 
6.1.2. Policy options to ensure certain requirement s at the point of trading and strengthen 
settlement discipline................................................................................................... 48 
6.1.3. Policy options to ensure regulators a nd markets obtain data on short positions 
(including through CDS)............................................................................................ 55 
6.2. The preferred policy options and instrument ............................................................. 65 6.2.1. The preferred policy options ...................................................................................... 65 6.2.2. Choice of instrument to ensure a coordina ted response by EU Member States to short 
selling and CDS ......................................................................................................... 66 
6.2.3. Impact on retail investors and SMEs ......................................................................... 67 6.2.4. Impact on third countries ........................................................................................... 68 6.2.5. Social impact........................................................................................................... ... 69 
6.2.6. Environmental impact ................................................................................................ 69 6.3. Estimate of impact in terms of compliance costs....................................................... 69 7. Monitoring and Evaluation ........................................................................................ 72 8. Annex 1 – Glossary of terms...................................................................................... 73 9. Annex 2 – Summary of public co nsultation on Short Selling.................................... 76 
9.1. Summary of the responses ......................................................................................... 76 9.2. List of contributors to  public consultation ................................................................. 80 
10. Annex 3: Overview of measures in force in EU 27 on short selling/CDS................. 86 
11. Annex 4 – Summary of di scussions between DG MARKT and CESR-POL on Short 
Selling, Paris, 14 April 2010...................................................................................... 88 
12. Annex 5 – List of organisations represente d in meeting of commission services with 
market participants and public authorities on credit default swaps ........................... 94 
13. Annex 6 – regulatory regime in th e united states on short selling............................. 96 
14. Annex 7 – bibliography of recent economi c literature on short selling, committee on 
economic and market analysis (CEMA), CESR ........................................................ 98 
EN 1-4   EN 15. Annex 7 – Data on shares outstanding on lo an as a proxy for volume of short selling 
transactions in the European Un ion, provided by dataexplorers.............................. 103 
16. Annex 8 – Estimate of compliance costs ................................................................. 106 17. Annex 9 – Table providing an overview of the scope of preferred options............. 114 
EN 5   EN 1. INTRODUCTION  
At the height of the financial crisis in  autumn 2008, competent authorities in the 
United States and several EU Member St ates adopted exceptional measures to 
restrict or ban short sell ing in some or all shares1. They acted due to concerns that at 
a time of considerable financial instab ility, short selling was aggravating the 
downward spiral in the prices  of shares, notably in fina ncial institutio ns, in a way 
which could ultimately threaten their viability and create systemic risks2. The 
measures adopted by Member States were divergent as the European Union lacks a specific legislative framework for d ealing with short selling issues.  
Since that time, regulators have deve loped through the Committee of European 
Securities Regulators
3 (CESR) a two-tier regime for the disclosure of short selling 
transactions to regulators and the public4, which they have called on the Commission 
to include in a proposal for a new European  legislative framework. Finally, concerns 
have been raised5 about the possible implications in  terms of settlem ent risk of so-
called "naked short selling"6.  
Short selling is the sale of a security th at the seller does not ow n, with the intention 
of buying back an identical secu rity at a later poin t in time to be ab le to deliver the 
security7. It can be divided into two types: "covered" short selling where the seller 
has made arrangements to borrow the securi ties before the sale and "naked" short 
selling where the seller has not borrowed the securities when the short sale occurs. Naked short selling is often used for intra day trading.  
The expression "short selling" is sometimes used in a more general sense to cover a 
broad range of actions that allo w an investor to profit from a price decline in an asset. 
                                                
 
1 Annex 3 includes a table giving an overview of the situa tion on key measures in the EU 27 taken from a note by 
CESR setting out the measures on short selling taken by Member States.  
2 For example, in Discussion Paper 09/1, Short Selling , February 2009, p. 3, the UK Financial Services 
Authority explained their reasons for introducing temporary short selling measures in September 2008 
as follows: "We did this at a time of extreme market turbulence, manifested in the forms of high and 
prolonged price volatility and downward pressure on th e prices of financial stocks in particular. We 
were concerned by the heightened risks of market abuse and disorderly markets posed by short selling 
in these conditions."  
3 CESR is an independent advisory group to the European  Commission composed by the national supervisors of the 
EU securities markets. See the European Commission's D ecision of 23 January 2009 establishing the Committee of 
European Securities Regulators 2009/77/CE . OJ L25, 23.10.2009, p. 18). The ro le of CESR is to improve co-
ordination among securities regulators, act as an advisory group to assist th e EU Commission and to ensure more 
consistent and timely day-to-day implementation of community legislation in the Member States.  
4 Committee of European Securities Regulators, Model for a Pan-European Short Selling Disclosure 
Regime, March 2010. The report advocates a two-tier model for disclosure of significant individual net 
short positions in all shares that are admitted to trading on an EEA regulated market and/or an EEA 
MTF. At the lower threshold of 0.2%, positions would be disclosed to the relevant regulator, at the 
higher threshold of 0.5% positions would be disclosed,  in addition to the regulator, also to the market as 
a whole. 
5 On 8 June 2010, President Sarkozy and Chancellor Merkel wrote to President Barroso urging the 
Commission to bring forward a legislative initiative on short selling and sovereign CDS encompassing 
the possibility of an EU wide prohibition of naked short selling and naked sovereign CDS . 
6 Responses from some national regulators to a questionnaire by the Commission services. The 
respondents wished their responses to remain confidential. A summary by the Commission services of a 
meeting with national regulators on short selling is included in annex 5. 
7 A glossary of key terms on short selling and Cr edit Default Swaps is included in annex 1. 
EN 6   EN In addition to short selling on cash markets,  a net short position can also be achieved 
by the use of derivatives, whether they ar e traded on exchanges or over-the-counter 
(OTC). 
A Credit Default Swap (CDS) is a derivati ve which acts as a form of insurance 
against the risk of credit de fault of a corporate or a gove rnment. In return for an 
annual premium, the buyer of a CDS is protec ted against the risk of default of the 
reference entity (stated in the contract) by th e seller. If the reference entity defaults, 
the protection seller pays the buyer the par value of the in strument in exchange for 
physical delivery of the reference instru ment, although settlement may also be by 
cash. 
In March 2010, concerns were expresse d by some governments also about the 
possible role played by deriva tive transactions, notably CDS, in relation to the prices 
for Greek sovereign bonds8. A number of Member States have adopted temporary or 
permanent restrictions at national level on short selling and CDS which are outlined in section 3.1.5. 
In light of concerns about the regulation of short selling and CDS, the Commission 
decided to include in its Work Programme  for 2010 a legislative initiative on short 
selling and Credit Default Swap s as a strategic initiative
9. This was restated in the 
Commission Communication of 2 June 2010 on  Regulating Financial Services for 
Sustainable Growth.10This impact assessment accompanies the proposal for a 
regulation on short selling and certain  aspects of Credit Default Swaps. 
It is important to note that this initiativ e is not the only one to  address problems in 
the markets highlighted by the current cris is. As announced in its Communication of 
2 June 2010, the Commission will complete  its full financial reform programme in 
the coming months. Of the existing or pending proposals listed in the 
Communication, a number are rela ted to this initiative. 
The proposal for a Directive on Alte rnative Investment Fund Managers11 aims to 
create a comprehensive and effective regu latory and supervisory framework at the 
European level, providing robust and ha rmonised regulatory standards for all 
                                                 
8 In a joint letter dated 10 March 2010 to Presid ent Barroso and Prime Minister Zapatero, President 
Sarkozy, Chancellor Merkel, Prime Minister Juncker and Prime Minister Papandreou wrote: "We 
therefore propose that the EU Commi ssion initiates as quickly as possible at European level an inquiry 
into the role and impact of speculative practices in connection with CDS trading in the government bonds of European countries. Should the inquiry ascertain market abuses  or that there is a well-founded 
suspicion that speculative practices are having a considerable impact on the development of yields, we 
should quickly examine measures to determine whether they are su itable and, if necessary, pass the 
appropriate legislation. These examinations should also consider introducing minimum holding periods 
for CDS trading, banning speculative CDS trading as  well as banning the acquisition of CDS which are 
not being used for hedging purposes." 
9 Communication from the Commission to the European Parliament, the Council, the European 
Economic and Social Committee a nd the Committee of the Regions, Commission Work Programme 
2010 – Time to Act , COM(2010) 135 final, Vol. 1, p. 4 and Annex I, p. 4.  
10 Communication from the Commission to the European Parliament, the Council, the European 
Economic and Social Committee a nd the European Central Bank, Regulating financial services for 
sustainable growth , COM(2010) 301 final, 02.06.2010, p. 7. 
11 Proposal for a Directive of  the European Parliament and of the Council on Alternative Investment Fund 
Managers and amending Directives 2004/39/EC and 2009/…/EC, COM(2009) 207 final, 30.4.2009. 
EN 7   EN managers and enhancing transparency to wards investors. Concerning effective 
supervision, the proposal fo r a Regulation establishing a European Securities and 
Markets Authority (ESMA)12 provides in its article 10 for ESMA to have the power 
to adopt individual decisions in emergency situations.  
In terms of enhanced transp arency, a forthcoming proposal  which is closely related 
to the initiative on short selling and Cr edit Default Swaps is the proposal for 
legislation to improve the functioning of de rivatives markets, which will strengthen 
the EU's financial market infrastructure, promote the standardis ation of derivatives 
contracts and develop central clearing partie s for derivative contra cts to substantially 
reduce risk. The Commission will also propose improvements to the Markets in Financial Instruments Directive
13 (MiFID) in order to strengthen pre- and post-trade 
market transparency and bring more deri vatives onto organise d trading venues.  
Finally, in the context of strengthened re sponsibility and cons umer protection, the 
Market Abuse Directive14 will be revised in orde r to extend its rules beyond 
regulated markets and to include deri vatives in its scope of application. 
2. PROCEDURAL ISSUES AND CONSULTATION OF INTERESTED PARTIES  
The proposal for a regulation on Short Sellin g and certain aspects of Credit Default 
Swaps and its impact assessment have been prepared in accordance with the Commission's better regulation principles. Th e proposal takes into consideration the 
observations and analysis contained in the reports published by the Committee of 
European Securities Regulators (CESR). The proposal and the impact assessment 
also take into consideration the comments received from stakeholders participating in 
a public consultation from 14 June to 10 July 2010.  
2.1. CESR and ESME reports 
DG Internal Market services asked the Eu ropean Securities Markets Expert Group 
(ESME
15), an independent adviso ry group to the Commissi on composed of market 
participants, to prepare a report on short se lling. The report containing a series of 
recommendations was adopted on 19 March 200916.  
                                                 
12 Proposal for a Regulation of the European Parliament and of the Council establishing a European 
Securities and Markets Authority, COM(2009) 503 final, 23.9.2009. 
13 Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in 
financial instruments, OJ L145, 30.04.2004. 
14 Directive 2003/6/EC of the European Parliament and of the Council of 28 January 2003 on insider 
dealing and market manipulation (market abuse), L 96/20, 12.04.2003. Article 1.2 defines market manipulation and article 5 requires Member States to prohibit any person from engaging in market 
manipulation. 
15 The European Securities Markets Expert Group (ESME) was established by Commission Decision 
2006/288/EC setting up a European Securities Markets Expert Group to provide legal and economic 
advice on the application of the EU securities Dir ectives (30.03.2006). The objective of the Group was 
to advise the Commission on various issues in relation to the EU securities markets. The Group 
consisted of 20 members, chosen acco rding to strict procedures to en sure the widest possible range of 
professional backgrounds (such as lawyers, economists and accountants) and geographical balance so that the different EU markets were covered. This non-binding advice assisted the Commission in 
fulfilling its tasks. ESME's mandate expire d on 31.12.2009 and was not renewed.  
16 The full text of the report can be found at: 
EN 8   EN The Committee of European Securities Re gulators (CESR) consu lted in the second 
half of 2009 on a possible pan-European mode l for the reporting and disclosure of 
net short positions in EU shares17. It then recommends that the Commission 
introduces such a regime as soon as possibl e. CESR also published on 22 September 
2008 (updated on 22 February 2010) a table setting out the measures adopted by 
national competent author ities on short selling.18 
DG Internal Market services held a meeti ng with CESR experts in Paris on 14 April 
2010 to consult national competent authorities  on issues relating to short selling, net 
short positions and CDS. The summary of the discussion is included in annex 4. 
National competent authoritie s also responded to a questi onnaire circulated by the 
Commission services in June 2010. 
The Commission services held two meetings on 5 March 2010 with representatives 
of market participants and national competent authorities on issues relating to sovereign CDS. The list of particip ants is included in annex 5. 
2.2. Public consultation  
In April 2009, the European Commission asked some high level questions on a 
possible regulatory regime for short selling in the context of a call for evidence on 
the review of the Market Abuse Directive launched on 20 April 2009
19. Most 
contributors responded that the Market A buse Directive was not the appropriate 
instrument for addressing short selling, as  most short selling does not constitute 
market abuse in the view of market participants.  
On 14 June 2010, the European Commissi on launched a public consultation on 
policy options for a possible legislative initiative on short selling. The Commission 
services received around 120 contributions . The non-confidential contributions can 
be consulted on the Commission's website20. The outcome of the consultation has 
been summarised in Annex 2. 
2.3. Steering Group  
The Steering Group for this Impact Assessment was formed by representatives of a 
number of services of the European Commission, namely the Directorate General 
Internal Market and Services, the Direct orate General Competi tion, the Directorate 
General Economic and Financial Affairs, the Directorate General Enterprise, the 
Directorate General for Health and Consumer s, the Legal Service and the Secretariat 
General. This Group met three times, on 18 May 2010, 7 July 2010 and on 23 July 
                                                                                                                                                         
 http://ec.europa.eu/internal_market/secu rities/docs/esme/report_20090319_en.pdf   
17 CESR/10-088, March 2010, c.f. footnote 4.  
18 Committee of European Securities Regulators, CESR/08-742, Measures adopted by CESR Members on 
short selling,  22 September 2008, updated 22 February 2010 
19 Call for evidence, Review of Directive 2003/6/EC on insider dealing and market manipulation (Market 
Abuse Directive). For the text of  the call for evidence, see:  
http://ec.europa.eu/internal_market/consultations/docs/2009/market_abuse/call_for_evidence.pdf  
20 See http://ec.europa.eu/internal_marke t/consultations/2010/short_selling_en.htm   
EN 9   EN 2010. The contributions of the members of the Steering Group have  been taken into 
account in the content and shap e of this impact assessment21.  
2.4. Impact Assessment Board  
DG MARKT services met the Impact Assessment Board on 30 August 2010. The 
Board analysed this Impact Assessmen t and delivered its opinion on 31 August 2010. 
During this meeting the members of the Board provided DG MARKT services with 
comments to improve the content of the Impact Assessment that led to some modifications of this final draft. These are:  
– Modifications to highlight the problem of  fragmented regulatory approaches to 
short selling and CDS and the added valu e that the EU can bring in creating a 
common European framework to ensure  the smooth functioning of the single 
market; 
– A clearer distinction between  risks which regulators ha ve expressed concern about 
and which should be the subject of EU acti on as part of a precautionary approach, 
and problems for which empirical evidence exists; 
– A more detailed explanation of the natu re of EU level coordination and the 
respective roles of national competent authorities and ESMA, particularly with regard to the circuit breaker and meas ures in exceptional situations, and 
clarification of how implementing measures will be used to further specify exceptional situations; 
– Clarification of which financial instrume nts are covered by each preferred option, 
notably through the addition of an overview table in the an nexes, as well as of the 
explanation and presentation of some of the options; 
– A fuller explanation of the rationale fo r exempting market making activities and 
how this option will be implemented so  as to ensure the effectiveness and 
efficiency of the legislation; 
– Clarification of how cooperation with non- EU authorities would ensure effective 
implementation and compliance; 
– Clarification of the analysis of compliance costs; 
– The inclusion of a more comprehe nsive glossary of key terms. 
                                                
 
21 In accordance with the rules for the elaboration of impact assessments the minutes of the last meeting of the 
steering group have been submitted to  the Impact Assessment Board toge ther with this impact assessment.  
EN 10   EN 3. POLICY CONTEXT , PROBLEM DEFINITION , BASELINE SCENARIO AND SUBSIDIARITY  
3.1. Background and context  
3.1.1 Who short sells, what and why  
Short selling is not a new phenomenon – it has been a feature of equity markets since 
at least the 17th century, when short sellers were accused of causing the collapse of 
shares in the Dutch East India company in 1609, and short sellers were accused of 
causing the 1929 stock market crash, which led to legislation in the United States to 
regulate short selling22. 
In theory, a variety of differe nt financial instruments are capable of being sold short: 
shares, credit instruments, interest rates,  currencies or commodities. However, in 
practice short selling is more widespread and can be conducted more easily for some instruments than others, and the evidence of risks, or concerns about potential risks, 
is greater for some instruments (i.e. shares ) than for others. With the exception of 
Credit Default Swaps, which are examined in more detail in section 3.1.2. below, 
derivatives will be considered in relation to their underlying instruments, as it is from 
this underlying instrument that they deri ve their value. Also, in most cases 
derivatives cannot really be sold short, but they can be  used to create a position 
which is economically equivalent to short selling the underlying instrument. 
Short selling in shares 
Short selling is used by a variety of ma rket participants including hedge funds, 
traditional fund managers such as pension funds and insurance companies, investment banks, market make rs and individual investors.
23 Short selling can be 
used for speculative purposes, to hedge a long position, for arbitrage and for market 
making. Examples of different reasons fo r short selling are provided in the box 
below. 
                                                 
22 Short sellers have been the villains for 400 years, Reuters, 26.09.08 
 Factbox: milestones in short selling history , Reuters, 16.07.08 
23 Discussion Paper 09/1,  Short Selling , February 2009, Financial Services Authority, pp. 7-9 for a more 
detailed analysis of who short sells and why.  
EN 11   EN Examples of reasons for short selling24 
Speculation : for example, an investment bank trading for its own book ("proprietary trading") 
may sell a share short because it believes the pri ce will decline, in order to profit from that 
decline by buying back the share at the lower price. However, short selling is a risky strategy, as if the share price rises instead of falling, then the short seller will have to close out the 
position at a loss or pledge more collateral to keep the position open. 
Hedging:  although pension funds and insurance companies tend to buy shares in order to 
profit from their (anticipated) rise over the long term, they often hedge their risk by selling 
short comparable shares to those in which they hold a long position. If the share price in their 
long position goes down, then they can limit their losses through the rise in the value of the short position. This is a common practice in most developed financial markets. 
Arbitrage:  for example when a hedge fund combines a short position and a long position in 
two different but inter-related shares, to make a profit from the price differential between the 
two shares. 
Market making:  in order to meet customer demand for securities which are not immediately 
available, market makers use short selling to fill client orders, i.e. to provide liquidity to the 
market.
 
 
Estimates of the volume of short selling of shares vary widely. Some studies estimate 
that short selling in the United States acc ounts for between 14 and 30% of equity 
trading volume25. Studies also show that short se lling volume can be  considerably 
higher in the US, particularly in shares of financial institu tions at times of financial 
instability; for example, short sales of sh ares in some US financial institutions 
exceeded 40% of trading volume in those shares in summer 200826.  
The availability and reliability of data on th e volume of short selling in Europe is 
limited in the absence of marking of trans actions or disclosure regimes, and of 
reporting of over the counter transactions27. In the consultation of regulators carried 
out by the Commission services, most regu lators who responded did not have any 
data on the volume of short selling transa ctions on their markets or reported very 
little or no short selling on their markets.  However, regulators in some Member 
                                                 
24 Ibid. 
25 "For the control stocks that are never subject to the shorting ban, NYSE short sales account for a cross-
sectional average of 14.12% of NYSE trading volume during the pre-ban period from 1 August through 
18 September [2008]", Boehmer, Ekkehart; Jones, Charles; and Zhang, Xiaoyan, Shackling short 
sellers: the 2008 shorting ban , working paper, 18 November 2008, p.  7. "Short sellers account for more 
than 20% of trading volume", Boehmer, Jones and Zang, 2008, quoted in Boehmer and Wu, Short 
selling and the informational efficiency of prices , 2009, p. 1. "Some estimates have short sellers 
responsible for between 20-30% of equity trading volume", Oliver Wyman, The effects of short-selling 
public disclosure regimes on equity markets , 2010, p. 6. 
26 Analysis of the Pre-Borrow Emergency Order,  Memorandum by the Office of Economic Analysis, 14 
January 2009, p. 6. According to the US Office of Economic Analysis, short selling in the 17 NYSE 
listed financial stocks subject to a pre-borrowing requirement on short sales represented 41.81% of 
trading volume in those stocks from 12 June to 11 July 2008. This fell to 30.74% after the introduction 
of the pre-borrow requirement on 15 July 2008. 
27 In contrast, the United States has a marking regime and provides for reporting of OTC transactions. The 
latter is an option which will be considered in the context of the review of the Directive on Markets in 
Financial Instruments. One Member State, the UK, currently requires OTC transaction reporting at 
national level. 
EN 12   EN States were able to provide some data, notably the UK, Spain and Greece, and data 
on securities lending, which ca n serve as a proxy for shor t selling, has been provided 
by Dataexplorers (see annex 7). For the UK, the FSA provided data on securities 
lending as a percentage of ma rket capitalisation as a pr oxy for the volume of short 
selling stock lending; accordi ng to this data, securities lending averaged between 1 
and 3% of market capitalisation between August 2006 and August 2009 
(disregarding spikes which the FSA attribut es to dividend payment periods). Since 
according to the FSA a large proportion of secu rities lending is for tax purposes, this 
data suggests lower levels of short sell ing. The UK FSA also pr ovided data based on 
disclosure of significant short positions in  financial sector shares only between 
January and May 2009; this showed that the largest proportion of short positions was 
in the range of 0.25-0.35% of th e total share capita l of the issuer, i. e. just above the 
UK disclosure threshold of 0.25%28.  
For Spain, the CNMV provided data from th e Spanish clearing house Iberclear using 
securities lending as a proxy for covered short selling. This data showing that 
covered short selling activit y in shares amounted to 1.4 % of the total number of 
trades in 2009, essentially stable from the figure in 2007, which was 1.36% . In terms 
of value, short selling re presented 6.47% of trading in  2009, again broadly stable 
from the figure of 6.35% in 2007. This data ap pears consistent with that provided by 
the UK and also using securities lending as  a proxy. Based on the disclosure of short 
positions between September 2008 and June 2010 in Spain, a total of individual 441 
short positions were reported and published, from 56 entities (mostly hedge funds), with an average position disclosed of 0.46% of the share capital of the issuer. The 
Spanish regulator also provided data estima ting the level of naked short selling in 
their jurisdiction based on failed transact ion statistics. When considering these 
figures it has to be noted that Spain has a permanent ban on naked short selling, so 
these cases represent occurrences of naked short selling despite the ban, and at the 
height of the crisis the Spanish regulator  reminded market part icipants of their 
obligations in this regard
29. According to their estimates, naked short selling 
represented 0.04% of all trades in  2009, down from 0.11 in 2007 (or 0.08% of 
trading volume in 2009, dow n from 0.30% in 2007).30  
Greece is the only EU Member State whic h has a requirement for short sale 
transactions on its market to  be flagged, and the Greek regulator is therefore in 
possession of data showing the actual volume and value of short sale transactions on 
its market. According to data for January  to June 2010, the volume of short selling 
transactions as a percentage  of total transact ions is in a range between 0 and 3.33%. 
In terms of value the ra nge is between 0 and 3.36%.31 
To conclude, it is difficult to obtain reliabl e data on the extent of short selling in 
Europe in the absence of marking of trans actions, or of disclosu re of short selling 
                                                 
28 Response by the UK FSA to Commission services questionnaire on short selling and Credit Default 
Swaps .  
29 "Agreement of the Executive Committee of the CNMV on naked short selling, adopted on September 
22nd 2008". http://www.cnmv.es/Portal/verDoc.axd?t={0f1fd720-9592-45fc-b293-4fc99e82ce4f} 
30 Response by the Spanish CNMV to Commission services questionnaire on short selling and Credit 
Default Swaps .  
31 Response by the Greek HCMC to Commission services questionnaire on short selling and Credit 
Default Swaps .  
EN 13   EN transactions. However, according to the data  outlined above it could be estimated to 
represent between 1 and 3% of market capitalisation using securities lending as a 
proxy, or less than 1% of the total share capit al of the issuer usi ng data on disclosures 
of net short positions in the UK and Spain as a measure. It is difficult to estimate the 
volume of naked short selling in the abse nce of data from countries where this 
practice is permitted, but the data from Spain suggests that this is a fraction of the total volume of short selling. However, whil e the volume of short selling in Europe 
appears on this evidence to be limited, conc erns remain about th e risks short selling 
can pose, especially in distressed markets,  and these are explored further in the 
problem definition below. 
Short selling in credit instruments 
Credit instruments include both corporate and sovereign bonds. In principle it is 
possible to sell corporate bonds short, but th e liquidity of the corporate bonds market 
is limited as there is no active secondary  market for a large part of the bonds 
outstanding. Several factors explain this: each  issuer tends to ha ve different issues 
outstanding, so secondary mark et activity is fragmented in to these different issues; 
and the maturity of corporate bonds is limite d compared to equities where there is no 
repayment schedule, and investors on co rporate bond markets tend to buy and hold 
for the long term. Therefore, most of th e short selling activities on corporate bonds 
take place through the CDS market, where th e liquidity is much higher. Regarding 
sovereign bonds, this market presents high er liquidity th en the corporate bond market 
as there tend to be fewer issues per issuer and each issue is of a larger size. In addition, the sovereign CDS market is le ss liquid then the corporate CDS market. 
Short selling a bond could ther efore be considered easier  and a short seller would 
face a more balanced choice betwee n using the bonds or the CDS.  
Short selling in interest rate instruments 
This market consists mostly of derivatives. There is no real short selling of interest 
rate derivatives as any deri vative contract does not pre ex ist the operation, it is only 
created when bought or sold; in other terms,  there is no secondary market. Interest 
rate derivatives are very global instrument s, and they are used by a wide range of 
participants for risk management purpos es and through often complex strategies. 
There is no evidence of concerns rela ted to short selling on this market. 
Short selling currencies 
Currency markets are open 24 hours a day, 7 days a week, and may be the most 
global market of all asset cla sses. Short selling does occur on this market and there is 
evidence of it being used in the past to drive down the price of a currency (most 
notoriously the speculation against the pound sterling by George Soros in the context 
of the instability in the Exchange Rate Mechanism in 1992; there have also been 
concerns expressed by some Member Stat es in February-March 2010 about the 
possible role of short selling of the euro  in the decline of the currency's value
32). 
Nevertheless, short selling regulation has b een very seldom used worldwide in the 
foreign exchange market, and when applie d, it has only been done by a few emerging 
countries.  
                                                 
32 Financial Times, Lagarde wants look into murky market , 14 February 2010. 
EN 14   EN Short selling commodities 
Strictly speaking, short selling of the unde rlying physical commodity is not an issue 
for financial regulation. Selling physical co mmodities short in anticipation of their 
price decreasing, which would then be bought back at the lower pr ice, may occur but 
this is probably dampened by the costs of storing/producing the goods, and is an 
option mainly for commodity companies. Whether this practice is harmful, for 
example for consumers, is an issue for sect oral (e.g. energy) legi slation rather than 
financial regulation.  
Entering into equivalent s hort positions through commodity  derivatives is possible, 
but attempting to disassociate this from legitimate hedging and price discovery is very difficult. This would also apply to shor t positions entered into either in the spot 
or derivative market as part of arbitrage st rategies, and putting cont rols on this could 
have a negative impact on price convergen ce. In addition, any c ontrols would require 
a highly differentiated approach according to each specific commodity market. Many 
commodity markets are global (e.g. crude oil,  metals) and trading could easily shift 
to other jurisdictions, and continue to se t prices for Europe. Furthermore, sector-
specific legislative proposals to enhance tran sparency and market integrity in certain 
commodities markets is under preparation, not ably for gas and electricity and for 
emissions allowances. 
3.1.2 Trades in Credit Default Swaps 
Credit Default Swaps (CDS) are financial de rivatives. Derivatives are referenced on 
an underlying, which in the case of CDS is the credit risk of an issuer. The credit risk 
of an issuer is the risk of default of that issuer on its obligations towards its creditors. 
CDS transfer credit risk from  one party to another.  
It is easiest to understand a CDS contra ct by comparing it with a bond. In a typical 
bond, the issuer agrees to pay the investor a regular sum, the coupon, in exchange for 
the principal amount, the issued amount. The in vestor is exposed to  credit risk, as the 
borrower may not return the principal:  therefore buying a bond implies taking a 
position on the credit risk of  the issuer. A similar economic effect can also be 
achieved by selling a credit default swap, but here no principal changes hands ex 
ante. In a CDS, the seller receives regul ar payments from the buyer, while his 
obligation materialises only in event of defa ult, when he has to provide for the credit 
loss. 
At the end of May 2010, the gross notiona l amount of the total CDS market was 
USD 14.5 trillion, with about 2.1 million contracts outstanding. The sovereign CDS 
market, which includes both sovereign indi ces and sovereign single names, reached 
USD 2.2 trillion, with about 0.2 million contra cts outstanding. The outstanding gross 
notional amount of the Itraxx Sovereign Index Western Europe was USD 140 bn 
(and USD 10 bn in net terms)
33. 
                                                 
33 See Depositary Trust and Clearing Company (DTCC) data 
EN 15   EN There are four main groups of market part icipants in the CDS market: dealers, non-
dealer banks, hedge funds and asset managers. The dealers are by far the largest players on the market.
34 
The aims of these market participants  are diverse and they employ different 
strategies: CDS can be used for hedging, ar bitrage or speculative purposes. Examples 
of the reasons for buying or selling CDS are provided in the box below. 
Reasons for trading CDS  
Hedging: CDS can be used to neutralise or reduce a ri sk to which the CDS buyer is exposed from 
another position. An example of such an "insurable interest" would be a bondholder's exposure to 
the credit risk of the issuer of the bond; by buying a CDS he can reduce that risk by passing it on to 
the CDS seller. The bondholder has hedged his po sition with a CDS. Sometimes the buyer of a 
CDS is seeking to hedge a risk other than the cred it risk of the bond issuer , for example the credit 
risk of a bank heavily e xposed to the bond issuer.  
Arbitrage: arbitrage is usually understood as the risk-free exploitation of price differences in 
connected markets. The typical ar bitrage operation that involves CDS is the combination of buying 
a CDS and entering into an asset swap where th e fixed coupon payments of a bond are swapped 
against a stream of variable payments. It is known in the market as a trade on the basis.  
Speculation : CDS can also be used to take a position in order to exploit price changes by trading 
in and out. For example, a CDS seller has taken on risk (in exchange for the regular payments he 
receives from the CDS buyer); he w ill gain from the contract if the credit risk does not materialise 
during the contract's term or if the compensation received will ex ceed a potential payout. If a CDS 
buyer does not hold an underlying insurable interest (known as 'naked CDS'), he is also taking a 
position: he would gain from the contract when the payout he receives from a possible default 
event exceeds the premiums he has paid, or when the market value of the CDS has increased above the acquisition price; such increase would reflect a perception by the market that the risk of default 
has raised. 
 
3.1.3 Economic benefits of short selling and CDS  
There are many studies on the economic effect s of short selling of shares, and most 
conclude that it has a number  of general benefits to the market (a bibliography of the 
economic literature on short selli ng is included in annex 5).  
First, it significantly increases market liquidity  in a security, as s hort sellers can sell a 
security without owning it35. Liquidity is important for a market as it makes the 
completion of trades more likely, and larg er trading volumes re duce transaction costs 
and tend to increase efficiency36. According to a study by the consultancy Oliver 
                                                 
34 Information provided by regulators and market participants to the Commission services at a meeting on 
CDS issues, 5 March 2010. 
35 Beber, Alessandro and Pagano, Marco, Short-Selling Bans around the World: Evidence from the 2007-
09 Crisis , CSEF working paper, examines the effect of short selling bans on liquidity by using bid-ask 
spreads as a measure of liquidity. The paper states, p 21: "Italy emerges as the country where the ban on 
short sales was associated with the most dramatic deterioration of market liquidity, followed by 
Denmark, Australia and Norway. The U.S., U.K. and Ir eland are in an intermediate group, while in the 
remaining countries short-selling bans have been as sociated with comparativel y mild increases in bid-
ask spreads – in the order of about 50 basis points or less." 
36 Gruenewald, Seraina; Wagner, Alexander; and Weber, Rolf, Short Selling Regulation after the 
Financial Crisis – First Principles Revisited , Working Paper, University of Zurich, 2009, p. 16. 
EN 16   EN Wyman, "as relatively substantial participants in equity markets, short sellers play an 
integral role in providing liquidity and maintaining market efficiency. When short 
sellers' level of participa tion decreases, market become less liquid, more expensive 
and more difficult to trade." 37 It is important to note that short selling typically 
involves not only the sale of the security c oncerned but also at a subsequent point the 
purchase of a similar quantity of the security to cover the short sale (so extra liquidity 
is provided from both sets of transactions). 
Second, it can act as a balance to irrationa l overpricing of securities and can mitigate 
price bubbles by allowing investors to act wh ere they believe that a security is 
overvalued38.  
Third, it leads to more efficient price discove ry as it prevents prices from reflecting 
only the views of the most optimistic investors in the market and leads to faster integration of information into the price of securities
39. A review of the economic 
literature by the FSA concludes that "in su mmary, the empirical literature tends to 
confirm, with some qualif ications, the theoretical pr oposition that short selling 
allows negative expectations about share pr ice developments to feed more directly 
into the actual share price and thus  contributes to efficient pricing."40 
Also, covered short selling requires the lending of securities to the seller to cover the 
settlement of the short sale. Securities  lending by institutions such as banks, 
insurance companies and pension funds ge nerates additional si gnificant revenue for 
longer term holders of securities.  
Academic studies also acknowledge that in troducing derivative securities increases 
the investment opportunities fo r investors, which in turn  could make markets more 
efficient, lead to positive welfare effects, and make the derivatives market interact 
with the underlying securities market. For example, CDS allow market participants 
to hedge their positions or express specifi c views on pure credit risk. In general, CDS 
markets are considered more liquid th an bond markets, as  they are more 
standardised. For example all soverei gn CDS on Greece have a unique reference 
which is the credit risk of Greece. On the contrary, the bonds issued by Greece will 
split into different issues with different sp ecificities, that will co-exist on the market. 
These different bonds will not be completely  interchangeable, at least not to the 
extent that CDS would be. The higher liqui dity of the CDS market allows market 
participants to express their views more eas ily. This is especially  the case with regard 
to taking a short position in an entity, whic h is easier to do on the CDS market than 
using bonds. On the bond market investors ha ve to rely on a functioning repo market 
in order to borrow the bonds necessary for s hort selling. In several countries, the repo 
market is not very deep and therefore is  less functional. In  addition, the required 
outlay to enter into a short position on the CDS market is much less than its 
                                                 
37 Oliver Wyman, The effects of short-selling public disclosure regimes on equity markets , 2010, p. 29. 
38 Battalio, Robert and Schultz, Paul, Regulatory uncertainty and market liquidity: the 2008 short sale 
ban's impact on equity option markets , University of Notre Dame, 2010, p. 9 cite Ofek and Richardson 
(2003) as suggesting "that the inability to short led to high prices for internet stocks in 1999 and 2000, 
and the relaxation of constraints on borrowing shares for shorting led to the eventual collapse of prices 
for these stocks". 
39 Bris, A., Goetzmann,W. N., Zhu, N., Efficiency and the Bear: Short Sales and Markets Around the 
World , 2007, Journal of Finance, Vol 62, No 3, p. 28. 
40 FSA, DP09/1 (February 2009), Annex 1 p. 3. 
EN 17   EN equivalent on the cash market. This is due  to the built in leverage effect of 
derivatives. 
While short selling and CDS transactions have  benefits, there are also risks and these 
are analysed further below. 
3.1.4 Stakeholders concerned by s hort selling and CDS transactions 
In addition to the financial institutions or investors who engage in short selling or 
CDS transactions for the reasons explaine d above, many other stakeholders can be 
affected by such transactions, notably:  
– issuers, who wish to maintain shareholde r value and therefore may fear that their 
share price may be affected negatively41;  
– financial institutions, who in an extreme case may face the risk of bank runs if 
short selling amplifies a fall in their share price in a disorderly way42; 
– individual investors, who may suffer from information asymmetry if they do not 
know the extent to which the price of a s ecurity is being affected by short selling 
and whether short sellers will need to later buy back the shares they have sold short
43; 
– regulators, who have an in terest in knowing whether s hort positions are building 
up which could pose a systemic risk or whether short selling is being used 
abusively44; 
– governments, as issuers of bonds, who may fear a negative impact on sovereign 
bond spreads and the cost of raising funds  as a result of short selling of 
government bonds in the cash market or th rough the use of bonds derivatives and 
CDS45. 
3.1.5 Overview of current regulato ry landscape and how it may evolve  
As outlined in the introduction and detailed in annex 3, EU Member State regulators 
adopted divergent approaches to the regul ation of short selling in autumn 2008, 
ranging from temporary bans on short selli ng of financial stocks to partial bans on 
naked short selling and to no action at all46. As explained in section 3.4, some 
                                                 
41 “Short Selling Study: The Views of Corporate Issu ers”, Opinion Research Corporation, October 17, 
2008. In this survey of CEOs of NYSE and NASDAQ listed issuers, almost 60% of respondents 
consider short selling to be harmful to their company’s stock and to their shareholders, and 75% of respondents think that short selling should be prohibited in periods of heightened volatility. 
42 FSA DP09/1, February 2009, p. 12. 
43 Ibid, p. 13. 
44 Source: responses provided by regulators to a questionnaire by the Commission services. 
45 Joint letter dated 10 March 2010 to President Ba rroso and Prime Minister Zapatero, from President 
Sarkozy, Chancellor Merkel, Prime Minister Juncker and Prime Minister Papandreou. 
46 Some Member States adopted temporary emergency measures banning short selling in financial 
institutions (e.g. Austria, Denmark, France, German y, Ireland, Italy, Netherlands, UK), whereas others 
(e.g. Finland, Sweden) adopted no rules on short sellin g at all in response to the crisis. Of the Member 
States which banned short selling in financial institu tions temporarily in 2008, Austria, Denmark and 
France still have those bans in place today. Furtherm ore, some Member States banned only naked short 
EN 18   EN Member States subsequently introduced sh ort selling disclosure  requirements with 
thresholds varying from 0.01% to 0.25% of the total share capita l of the issuer.  
Those Member States that introduced tem porary measures did so due to concerns 
that short selling may have been aggravati ng the downward spiral in the prices of 
shares, notably in financial institutions, in  a way which could pose risks to financial 
stability, orderly markets and market integrity47.  
In addition to the measures adopted by a number of Member States in autumn 2008, 
the Greek regulator introduced the flagging of short sale or ders and an uptick rule on 
15 May 200948. The German regulator BaFin adopted on 18 May 2010 a temporary 
ban (until 31 March 2011) on CDS transactions  where the reference liability is also a 
liability of a euro zone country and is not used to hedge default risks (i.e. a ban of 
'naked CDS' on sovereign debt); the ban al so concerns uncovere d short selling of 
debt securities of eurozone countries admitted to trading on a domestic exchange, 
and a ban on uncovered short selling of shares in 10 financial institutions 49. On 28 
April 2010 the Greek Capital Markets Commi ssion decided to temporarily ban short 
selling of shares listed in the Athens Exchange; this was lifted on 26 August 2010 but 
a ban on naked short selling was maintained50. 
On 2 June 2010, the German Cabinet of Ministers endorsed a draft law that 
essentially bans naked short-selling of all shares and government bonds traded on a 
German regulated market including correlat ed derivatives on shares, and of certain 
credit derivatives and currency derivatives that are entered into in Germany without 
having a relevant hedging function51. On 10 June, the French National Assembly 
adopted in first reading a draft law on banking and financial regulation which 
reduces the settlement period for sh ort selling from three days to one52. On 1 July 
2010, new rules including the flagging of sh ort sale orders became effective in 
Poland53. 
At European level, national competent aut horities discussed and agreed within CESR 
in March 2010 a two-tier regime for the disc losure of short sell ing transactions to 
                                                                                                                                                         
selling in certain financial institutions (Belgium, L uxembourg, Portugal) or in  all issuers (Greece), 
while another already had a ban on na ked short selling in place (Spain).  
47 CESR report, Model for a Pan-European Short Selling Disclosure Regime, CESR/10-088, March 2010, 
p. 3. 
48 CMC rule 1/509/15.5.2009 
49 General Decree of the Federal Financial Supervisory Authority (BaFin) on the prohibition on 
contracting a credit derivative or entering into a tran saction on the same if a no more than insignificant 
reduction of the protection buyer’s risk is achieved thereby, of 18 May 2010; General Decree of the 
Federal Financial Supervisory Authority (BaFin ) on the prohibition of uncovered short-selling 
transactions in debt securities of Member States of  the EU whose legal currency is the euro, of 18 May 
2010; General Decree of the Federal Financial Supe rvisory Authority (BaFin) on the prohibition of 
uncovered short-selling transactions in certain shares of 18 May 2010 
50 See guidance on HCMC's decision regarding short selling ban:  
http://www.hcmc.gr/photos/kefa laiagora/files/Guidance%20on%20Short%20Selling%20Ban_110510.p
df Lifting of ban – see press release: http://www.hcmc.gr/photos/nea/files/Short_Selling_260810.pdf   
51 Draft law on the Enhancement of Integrity of the Financial Markets, German Ministry of Finance, 25 
May 2010 
52 Projet de loi adopté par l'Assemblée Nationale, de régulation bancaire et financière, TA no. 485, 10 
June 2010, chapter 5 article 7bis. 
53 See http://gss.unicreditgroup.eu/gss/pdf/Poland/Newsflashes/PL20100526_016.pdf  and 
http://www.gpw.pl/zrodla/ papierywartosciowe/krotka/pdf/rules-ks.pdf   
EN 19   EN regulators and the public54. CESR has recommended that those CESR members that 
already have the necessary powers at nati onal level should begi n to implement the 
model and that others should do so on a best  endeavours basis. The report advocates 
a two-tier model for disclosure of signifi cant individual net short positions in all 
shares that are admitted to trading on an  EEA regulated market and/or an EEA 
multilateral trading facility (MTF). At the lower thres hold of 0.2%, positions would 
be disclosed to the relevant regulator, at  the higher threshold of 0.5% positions would 
be disclosed, in addition to the regulat or, also to the market as a whole. 
At EU level, when short selling is carried  out in connection with  abusive strategies, 
such as the spreading of false rumours in  order to drive down share prices, it is 
prohibited by the Market Abuse Directive (MAD)55. However, there is currently no 
overarching EU legislative framework dealin g with other risks th at can arise from 
short selling.  
With regard to the regulation of the CDS market, which is an over the counter (OTC) 
market operated by broker dealers, these broke rs dealers need to be authorized under 
the requirements of article 5 of the Dir ective on Markets in Financial Instruments 
(MiFID)56. These firms are also subject to the op erations conditions laid out in this 
same Directive (articles under Chapter II). Nevertheless, the par ticipants in these 
markets are considered professional clients or eligible counterparties in the MiFID terminology (see article 24 and Annex II of the Directive). Ther efore, they do not 
benefit from the same level of protection as  of retail investors. Furthermore, the CDS 
market is not operated on regulated markets or MTFs and is not subject to the same 
transparency or reporting rules. Only a few countries have decided to extend the 
reporting obligations (UK, Spain), options wh ich are defined in Recitals 45 and 46 of 
the MiFID Directive, to the CDS market. 
Regulatory developments on short selling in the USA
 
Other regulatory developments which are rele vant in this contex t have occurred in 
the United States in recent years (a more  detailed overview and explanation of the 
US measures is provided in annex 6). The United States operated an 'uptick rule' 
from 1937 until its abolition by the Securiti es and Exchange Commission (SEC) in 
2007. In 2004, the SEC adopted Regulation SHO57 which introduced a number of 
additional requirements for short selling: a 'locate' rule for short sellers, a flagging regime and a "close-out" requirement for short positions. On 24 February 2010 the SEC adopted the "revised uptick" or "circuit  breaker" rule. This rule restricts short 
sales of a share whose price has fallen by more than 10% compared to its closing 
price the previous day
58.  
                                                 
54 CESR,  March 2010. 
55 Directive 2003/6/EC of the European Parliament and of the Council of 28 January 2003 on insider 
dealing and market manipulation (market abuse), L 96/20, 12.04.2003, articles 1.2 and 5. 
56 Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in 
financial instruments, OJ L145, 30.04.2004. 
57 Regulation SHO, Securities and Exchange Commi ssion, 17 CFR PARTS 240, 241 and 242 [Release 
No. 34-50103; File No. S7-23-03] http://www.sec.gov/rules/final/34-50103.htm#P19_2741   
58 The SEC's New Short Sale Rule: Implications and Ambiguities , Davis Polk Client Memorandum, 
08.03.2010, p. 4.  
EN 20   EN During the financial crisis, the SEC intr oduced a number of temporary emergency 
measures. On 15 July 2008, the SEC introduced a temporary "pre-borrow" requirement on short selling of shares in 19 systemically important financial institutions
59. On 18 September the SEC imposed a temporary ban on short sales of 
799 financial stocks60, which grew to 1000 issuers. In  September 2008 the SEC also 
tightened the "close-out" requirement so that it applied to all securities not settled the 
day after the normal settlement date, and imposed temporary reporting requirements on certain short sa les and positions.
61 Since 1 August 2009, the SEC has been 
working with self-regulatory organisati ons to make short selling volume and 
transaction data available to  the public through the latter's web sites. The Wall Street 
Reform Act enacted into law by the US President on 21 July 2010 includes certain 
provisions on short selling, not ably it requires the SEC to adopt rules for public 
disclosure, at least monthly; of the amount of short sales by inst itutional investment 
managers62.  
Regarding CDS and especially sovereign CDS, no specific measures have been 
adopted by the US authorities for the tim e being. However, CDS fall within the 
scope of new US legislation on financial se rvices just adopted by the US Congress, 
and the CFTC and SEC will be expected to produce joint rules to implement this.  
As this overview shows, the regulatory landscape  is not static, either in the EU or the 
United States. In light of the recommendati ons of CESR for a disclosure regime, 
Member States may adopt national legisl ation to implement these recommendations, 
although some may prefer to wait until a European legislative initiative is proposed. CESR is also considering a possible regime for disclosure to regulators of significant 
net short positions in sovereign bonds. These net short positions would take into consideration short positions obtained through bonds and credit derivatives, 
including CDS transactions on sovereign bonds. Finally, as e xplained above there 
has been a strong call fo r EU legislative action by some heads of state and 
government. 
3.2. Problem definition 
This section examines the main risks associated with short selling in the European 
Union and the problems they give rise to. These risks and problems can be 
summarised as follows: (i) risks of negative price spirals, which can result in disorderly markets and possible systemic risk s; (ii) risks of settlement failure that 
may be associated with naked short selling; (iii) accompanying these risks is the problem of transparency deficiencies on short selling transactions which prevent 
markets and regulators from effectively preventing potential negative impacts of 
short selling, resulting in risks to financial stability, market integrity and information asymmetries between market participants. Finally several Member States have taken, 
                                                
 
59 SEC Release 34-58166, Emergency Order Pursuant to  Section 12(k)(2) of The Securities Act of 1934 
Taking Temporary Action to Respond to Market Developments, July 15, 2008. Available at: 
http://www.sec.gov/rules/other/2008/34-58166.pdf. 
60 SEC, Emergency Order Pursuant to Section 12(k)( 2) of the Securities Exchange Act of 1934 Taking 
Temporary Action to Respond to Market Developments. Release 34-58572. September 17, 2008. 
Available at: http://www.sec.gov/ rules/other/2008/34-58572.pdf. 
61 The D.E. Shaw Group Market Insights, May 2010, p. 6. 
62 Davis Polk, Summary of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Enacted 
into Law on July 21 2010, 21 July 2010, p. 70. 
EN 21   EN or are likely to take in future, action to address the above risks and problems, but in 
an uncoordinated manner. This fragmented regulatory framework then leads to the 
most important problem, that of (iv) increased compliance costs for firms and 
potential regulatory arbitrage. 
The following problem tree provides an ove rview of the various problems and risks 
that arise in the context of short selling. The issues are displayed in the problem tree 
in order of their importance, starting with  the most important problem, regulatory 
fragmentation.  
A detailed explanation will follow in the section below, which begins with the 
explanations of the risks of  negative price spirals and se ttlement risks, followed by 
the problems of transparency defici encies and regulator y fragmentation.  
EN 22   EN  
Drivers Risks/Problems Consequences 
 
3.2.1. Other related issues outside of  the scope of this initiative  
In addition to the problems outlined above and described in the problem definition, 
there are a number of other risks and probl ems which are related to short selling and 
CDS which will be addressed in other pending initiatives: 
– Mitigation of counterparty credit risk of CDS transactions: the options aimed at 
reducing counterparty credit risk (either th rough bilateral or cen tral clearing) in 
the OTC derivatives market, including the CDS market segment, are examined in the impact assessment for the legislative proposal on derivatives and post-trade market infrastructures, due by the end of the summer, as this is an issue which is of concern for all derivatives and is th erefore best addre ssed in a horizontal 
instrument; 
– Lack of transparency on CDS positions : the options aimed at increasing the 
transparency of OTC derivatives positions, including CDS positions, are also considered in the impact assessment on derivatives and post-trade market 
infrastructures as this is a horizontal issue for all derivatives; 
EN 23   EN – Transparency deficiencies for regulators on all financial transactions: currently, 
only transactions on regulated mark ets are required to be reported63, whereas OTC 
transactions are not. The option to re quire reporting to regulators of all 
transactions, including OTC transactions, in  all instruments, not just significant 
net short positions, will be examined in the impact assessment for the revision of the Directive on Markets in Financial In struments (MiFID), due by the beginning 
of 2011, as it would provide re gulators with an additional tool to detect possible 
systemic risks and risks to market integrity; 
– Transparency deficiencies for regulator s concerning all fina ncial positions: the 
option to require the reporting of all significant financial positions, whether long or short, and the possibility of setting lim its for such positions, will be assessed in 
the impact assessment for the MiFID review, as this option could provide regulators with a tool to prevent market  participants from creating disorderly 
markets through excessively large positions and to detect possible systemic risks; 
– Market manipulation through OTC deri vatives: the opti on to extend the 
prohibition of market manipulation to a ll OTC instruments including derivatives 
which could impact the prices of financial instruments traded on a regulated market or MTF will be considered in the impact assessment for the review of the Market Abuse Directive, due by the end of the year. This option would complement this initiative by providing regulators with the tools to sanction possible market manipulation of und erlying bond mark ets through CDS. 
As the above problems and the possible optio ns to tackle them are horizontal in 
nature, for reasons of efficiency and better  regulation they are be st tackled in other 
initiatives, which are all subject to imp act assessment, and are therefore excluded 
from the scope of this impact assessment.  
In addition, the Council and the European Parl iament are discussing in the context of 
discussions on the ESMA Regulation
64 the possibility of ES MA having the task to 
temporarily prohibit or restrict  certain types of financial activities that threaten the 
orderly functioning and integrity  of financial markets or th e stability of the financial 
system under the conditions set out in specific le gislative acts or in an emergency 
situation. The possibility of  prohibiting some products coul d also be disc ussed within 
the revision of MiFID. 
Finally, the European Parliament has pr oposed amendments to the proposal for a 
Directive on AIFM which would regulate short selling and nake d short selling. 
However, the Commission considers that these issues are best addressed in a 
horizontal initiative aimed at all investors w ho engage in short selli ng, rather than an 
instrument aimed only at alternative inve stment fund managers, since all investors 
can potentially engage in short selling a nd legislation only addressed at one category 
of investors would l eave regulatory gaps. 
                                                 
63 Article 25 of the Directive on Markets in Financial Instruments.  
64 COM(2009) 503 final, 23.9.2009. 
EN 24   EN 3.3. Problem 1: Risk of ne gative price spirals 
Short selling can lead to more efficient price formation by preventing the prices of 
securities from reflecting only the views of  the most optimistic investors. However, 
especially in distressed markets when financ ial confidence is lack ing, there is a risk 
of short selling creating the impression that there is more supply on the market than 
there really is, and thereby inciting others  to sell ('herding behaviour'), which can 
lead to excessive downward pressure on the price of securities. The risk of negative 
price spirals becoming self-fulfilling, which can lead to disorderly markets and even systemic risks, is the main concern expr essed by regulators with  regard to short 
selling
65. 
The risk of short selling of shares in fi nancial institutions amplifying negative price 
spirals and leading to systemic risks (thr ough a 'contagion effect') can be explained 
with reference to the financial crisis. While fundamentals and lack of investor 
confidence rather than short selling were  arguably the major contributors to the 
underlying market volatility, a number of EU  regulators and othe r regulators around 
the world introduced emergency bans on short selling of financial stocks in autumn 
2008 due to concerns that exce ssive short selling could amp lify the decline in prices, 
which could become a self-fulfilling dow nward price spiral and ultimately lead 
financial institutions into financial difficulties through bank runs and have a 'contagion effect'
66on other institutions. 
It is important to note that short selli ng on cash markets is not the only way for an 
investor to secure a short position; this can  also be achieved by the use of derivative 
transactions such as options or contracts for difference67. CDS can also be used to 
secure an economic short position. B uying a CDS without holding an underlying 
insurable interest ('naked CDS') is economi cally equivalent to short selling a bond, as 
the naked buyer benefits if the price of the CDS goes up. The CDS price will go up if 
the risk of default increases, or at least the perception of the risk of default by the 
market increases. Any perceived increase in the risk of default of a bond issuer will 
result in increased spreads and increased interest rates on the bonds, hence a decrease 
in the price of the bonds. So, the buyer of the naked CDS be nefits from an evolution 
of price which is symmetrical to the one benefiting the person short selling the bond. 
A specific problem which has been raised by several government s and regulators in 
Europe68 with regard to CDS concerns th e interaction betw een CDS and bond 
markets, and the fear that this inter action could cause mispricing on bond markets 
and thus higher funding costs for governme nts. As CDS contract s tend to be more 
liquid than the underlying bonds, and are of ten used by investors who are more 
reactive in their investments than bondholde rs, CDS are sometimes considered as 
likely to integrate new inform ation faster than the bonds.  
Furthermore, as the investors using CDS ar e also more mobile than traditional bonds 
investors, CDS prices can be more vol atile than bonds prices. Because of the 
arbitrage relationship mentioned before, CDS and bonds prices are interconnected. 
                                                 
65 Discussion Paper 09/1, Short Selling , February 2009, p. 3, UK Financial Services Authority. 
66 Ibid, p. 12. 
67 FSA DP09/1, February 2009, p. 7. 
68 Cf Letter from France, Germany, Greece and Lu xembourg to Mr Barroso dated 10 March 2010 
EN 25   EN Nevertheless, this interconnection is comple x. Furthermore, the structure of the CDS 
market tends to be concentrated.69 This concentration could contribute to higher short 
term volatility in CDS prices. For example,  a sudden rise in the demand for CDS to 
hedge either pure sovereign risk or more general macroeconomic risks, or even to 
speculate on that market, may unleash disp roportionate effects on the CDS prices if 
their supply cannot react swiftly  enough in the short run. If market participants base 
their expectations concerning bond prices on CDS behaviour, this may contribute to 
a very fast decline of prices on the ca sh bond market, which may lead to self 
fulfilling expectations. Traditional bonds inve stors may take fright at the drop in 
value of their investments caused by the contagion of the CDS market and start 
disinvesting. The disposal of their bond positions by long term investors could 
accelerate the fall of the bond market. 
Furthermore, because of its mechanisms, the CDS presents the danger of self-
fulfilling effects that can ope n risks of moral hazard. If market participants buy CDS 
without holding a proportionate insurable interest in the underlying debt obligation or 
exposure to the underlying credit risk, it can be argued that such a possibility gives 
the holder of the CDS a perv erse incentive to precipita te a default and therefore 
obtain the payout foreseen by the CDS. Howeve r, as it is difficu lt for a CDS buyer to 
achieve such an outcome directly, the mechanism is argued to be more indirect: creating strong demand for CDS drives up the credit risk premium, making it more 
expensive to issue bonds and roll over de bt, which can create capital gains for 
investors with short positi ons on the underlying bonds; push ed to its extreme, this 
could ultimately result in a default of the i ssuer. Nevertheless, such an action is likely 
to be very difficult to ach ieve regarding sovereign CDS markets as they only 
represent a tiny fraction of  the underlying bond markets
70. A price evolution on CDS 
that would be "too artificially" driven w ould be very short lived and counterbalanced 
by the price evolution on the bond market. The difference in size between the 
sovereign CDS and bonds market is also likely  to play a role in limiting the effects of 
a negative price spiral. 
There are other risks associated with CD S, for instance, the mechanism of the 
instrument itself: in case the entity covered by the CDS contract defaults, the seller of 
protection may have to disburse large amount s, and may not be in a position to meet 
these payments. This creates huge counterparty risks71. However, this risk is not 
addressed here as it is cove red in the impact assessment for the separate Commission 
initiative on market infrastructures72. 
In summary, the responses of regulator s to the questionnaire by the Commission 
services revealed that many of them have concerns about the risk of short selling amplifying price falls in distressed markets,  and that this could lead to bank runs 
through a contagion effect. While to date  there is no clear empirical evidence 
showing a causal link between short selling a nd negative price spiral s, the concern of 
                                                
 
69 See European Central Bank report dated June 2009 on the sovereign CDS market 
70 At the end of May 2010, the outstanding of sovereign CDS stood at USD 2.2 trillion to be compared to 
an outstanding sovereign bond market of around USD 40 trillion (source: DTCC and BIS) 
71 See Commission Staff working paper dated 20 October 2009 accompanying Commission 
communication on a roadmap for ensuring, effi cient, safe and sound derivatives markets 
72 See Public Consultation on Derivatives and Market Infrastructures, launched on 14.06.2010: 
http://ec.europa.eu/internal_market/consultations/2010/derivatives_en.htm   
EN 26   EN regulators was sufficient to lead many of them  to restrict or ban short selling during 
the financial crisis as a pr ecautionary measure and most regulators have expressed 
support for clear powers in excep tional situations to guard against this risk in the 
future (see annex 4). Further, the fact th at Member States have taken divergent 
regulatory responses to this risk has led to a fragmented regulatory framework which 
leads to increased compliance costs for market participants and potential for 
regulatory arbitrage (see problem 4). 
3.4. Problem 2: Risk of sett lement failure associated with naked short selling 
The risk of the short seller failing to deliv er the shares to the buyer by the settlement 
date, as well as a risk of increased price volatility, are the main risks associated by 
some regulators with naked short selling73.  
Data on levels of settlement failure is ve ry limited, but the data available from some 
Member States suggest they are low in Eu rope. According to the data provided by 
one regulator, settlement failures represented 3.89% of all equity transactions cleared 
by a central counterparty (CCP) in 2010, compared to 2.74% in 2009. In another 
Member State settlement failures represented 2.71% of all transactions in 200974. In 
Spain (where naked short selling is banned) , settlement failures occurred in 0.11% of 
all securities trades  in 2007 and 2008 and in 0.04% of trades in 2009; for sovereign 
bonds settlement failures repr esented 0.22% of transact ions in 2009 and 0.003% of 
corporate bonds in the same year75.  
When assessing the reasons for these settleme nt failures, the few regulators that were 
able to provide reasons cited administrativ e problems such as back-office mistakes, 
naked short selling or other factors such  as the delayed tran sfer of funds for 
payment76. The Spanish regulator carried out a study of settlement failures between 
January and December 2008 which showed that 59% of settlement failures came from naked short selling activity, alt hough only 0.39% of the total settled amount 
could be considered as settlement failure
77.  
In terms of qualitative responses to the consultation of regulators carried out by DG 
Internal Market78, one regulator cited several cases of "massive naked short selling 
prior to capital increases which resulted in failure to settle on settlement day and 
market disturbances". One regulator sanc tioned an intermediary in September 2008 
who was unable to deliver securities in due  time as a result of uncovered short 
selling; they also identified a number of cases of suspected naked short selling end 
2008 but had difficulties to determine the li ability of the persons involved. On the 
other hand, 14 regulators had no evidence or ex perience of naked short selling or of 
settlement problems occurring as a result, or thought that the risks were limited or 
could be addressed by settlement discip line. While the UK FSA sees "occasional 
cases of problems caused by naked short selli ng in the equity markets", they consider 
                                                 
73 Source: responses by national regulators to questionnaire by the Commission services. Unless the origin 
of the data is clearly indicated, sources are anonymous at the request of the regulators concerned who 
wished their identity to remain confidential. 
74 Source: responses by national regulators to questionnaire by the Commission services. 
75 Source: data provided by Spain in response to a questionnaire by the Commission services. 
76 Source: responses by national regulators to questionnaire by the Commission services. 
77 Source: data provided by Spain in response to a questionnaire by the Commission services. 
78 Source: responses by national regulators to questionnaire by the Commission services. 
EN 27   EN "that the overall risks from naked short sell ing are minimal". According to the FSA's 
discussions with exchanges and market participants, "naked short selling is by no means a principal source of settlement failures – more comm on are administrative 
errors or the knock-on effects of problem s elsewhere in the settlement chain"
79  
In the US, concerns about high levels of settlement failure linked with naked short 
selling led the SEC to introduce an emergency order on 15 July 2008, imposing a requirement on short sellers of specific fina ncial stocks to borrow those shares before 
entering into a short sale. An  analysis by the US Office of Economic Analysis looked 
at settlement failures for 19 stocks listed in  the emergency order before and after the 
order came into force, and found "a large reduction in fails to deliver" of 64% in volume and 56% in value.
80 
It should be recalled that the Directive on markets in financial instruments (MiFID) 
imposes specific obligations  on market operators to have in place effective 
arrangements to ensure transactions can be settled81, and most exchanges and 
Member States have rules on settlement  discipline. The Commission services are 
also undertaking separately pr eparatory work for a horizontal initiative which will 
address settlement discipline, including the option of a possible harmonisation of 
settlement period. 
At the same time, in their responses to the questionnaire by the Commission services 
or the public consultation, seve ral regulators cited the risk of price volatility as being 
greater with naked short selling than covered short selling. Some regulators 
expressed concern that in extreme cases  naked short selling can put enormous 
pressure on share prices, which can in turn  endanger the stability of the financial 
system82. This is because naked short selling enable s the seller to sell, in principle, an 
unlimited number of shares in a very shor t space of time as th ey do not have to 
ensure that their position is covered first by borrowing or locating shares to borrow.83 
One regulator cited the Porsche-Volkswagen case as evidence of this, when the 
number of shares being sold exceeded by a significant margin the number available 
to borrow as Porsche had secured a signi ficant holding in Volkswagen through the 
use of derivatives.84 
In summary, while some regulators consider the risk of settlement failure to be 
limited and consider that to the extent that any action should be ta ken to address risks 
of naked short selling, this should be confined to enhanc ed settlement discipline, 
others do perceive a risk of settlement failure, as well as a risk of increased price 
                                                 
79 Source: response by the UK FSA to a questionnaire by the Commission services. 
80 Office of Economic Analysis, Analysis of the July Emergency Order Requiring a Pre-Borrow on Short 
Sales , 14 January 2009, pp. 12-13. According to the OEA study, "prior to the Order, the 19 issuers in 
the order sample had 2.8 million in fails valued at $64.2 million per day. With the order in effect, these 
19 issuers had 1 million in fails valued at $28.4 million per day, representing decreases of about 64% 
and 56% respectively. The number of securities with fails declined from 12 to 4.5 per day, representing a decline of about 63%. (…) In su mmary, we found that the Emergency Order led to a large reduction 
in fails to deliver and significantly  reduced the frequency of new fails." 
81 Article 39 currently requires regulated market op erators to have effective arrangements in place to 
facilitate the efficient and timely finalisation of tr ansactions executed on their systems. A similar 
requirement for MTF operators can be found in MiFID article 14.5. 
82 Response by the German Federal Ministry of Finance to the public consultation, p. 5. 
83 Response by the AMF to the public consultation, p. 4. 
84 Confidential response by a regulator to the questionnaire by the Commission services. 
EN 28   EN volatility, arising from naked short selling which should be addressed as a matter of 
principle and as a precaution to guard agai nst possible systemic and market integrity 
risks. In addition, the fact that Member St ates have adopted different measures in 
relation to the risk of settlement failu re and naked short selling fragments the 
European regulatory framework, leading to higher compliance costs and potential for 
regulatory arbitrage (s ee problem 4 below). 
3.5. Problem 3: Transparency deficiencies  
In most EU Member States there are curre ntly no disclosure requirements for short 
selling or CDS transactions, either to regul ators or to the public, so these Member 
States have no direct access to  data on the short positions held in their jurisdictions; 
although as a result of the financial cr isis, a number of Member States have 
introduced different short selling disclosure requirements85. However, consensus was 
reached by all regulators within CESR to in troduce a disclosure regime for net short 
positions relating to EU shares. For CDS, the Depositary Trust and Clearing Company (DTCC) in the US operates a trad e information warehouse that claims to 
collect information on 95% of the trad e done on CDS in the world. Therefore 
regulators can obtain this data by requesting it from the DTCC. 
Regulators have expressed concern that the absence of information about short 
selling activity makes it difficult for them to detect the build-up of positions which could have implications for the stability of markets. Greater transparency through 
disclosure to the regulator could help regul ators to identify when this is occurring, 
and serve as a deterrent to the taking of  aggressive short positions which could 
contribute to disorderly markets
86. 
Another difficulty is that in the absen ce of transparency requirements for short 
selling which cover short positions obtained  through OTC transactions or derivative 
transactions, regulators w ould not have a complete picture of which market 
participants held a short position and any tr ansparency requirements could easily be 
circumvented by a migration of sale s off market or to derivatives87.  
The lack of information on s hort positions also means that  regulators cannot properly 
monitor short selling transa ctions for possible market abuse, resulting in the 
possibility of abusive behaviour not being detected or sanctioned88. Although market 
                                                 
85 See table in annex 3. Concerning disclosure, one Member State requir ed daily disclosure of all short selling 
transactions to the regulator (Greece, unt il 1.06.09), others require disclosure when a threshold of 0.25% of the total 
share capital of certain financial stoc ks is breached (Belgium, France, Ire land, Spain and UK) and others set a 
different threshold (Hungary – 0.01%, Greece – 0.10% fro m 1.06.09). The remaining Member States require no 
disclosure of short selling transactions at all. Greece a nd Poland have rules in place requiring the flagging of short 
sale orders.  
86 FSA DP09/1, February 2009, pp. 24-25/ 
87 CESR/10-088, March 2010, p. 9 and Regulation of Short Selling – Consultation report , IOSCO 
Technical Committee, March 2009, p. 14. 
88 CESR report, Model for a Pan-European Short Selling Disclosure regime , CESR/10-088, March 2010, 
p. 5: "CESR considers that improving the transparency of short selling would have distinct benefits 
which would outweigh the associated costs. It would help deter and constrain particularly aggressive 
large-scale short selling which may threaten the maintenance of orderly markets or pose the risk of market abuse and provide early warning signs of a build-up of large short positions, thereby alerting 
regulators to potentially abusive behaviour and enabling them to monitor and take action more 
effectively." 
EN 29   EN participants argue that most short selling is  not abusive, and abus ive short selling is 
already prohibited by the Market Abuse Dire ctive, short selling can  constitute market 
abuse in several ways: when it creates misl eading signals about th e real supply or the 
correct valuation of a share; when it is us ed in conjunction with the spreading of false 
rumours to drive down the pric e of the share being sold short; or when it is carried 
out on the basis of inside information89. According to some regulators, there may be 
a greater risk of market abuse a ssociated with naked short selling90. There is concern 
also that financial institutions may be par ticularly vulnerable to abusive short selling, 
particularly at a time of severe market instability.91 
Concern has also been expressed by some regulators (in five Member States) that 
speculators may be driving down the pr ices of government bonds by using Credit 
Default Swaps (CDS)92. The concern of these regulators is that in the absence of 
information about derivative tr ansactions it is more diffi cult for them to detect the 
build-up of positions which could cause financial instability, as well as possible market abuse. A similar comment can be made for sovereign bonds transactions. 
For most regulators in Europe, the ease of  obtaining access to data on derivatives 
varies according to the existence or not of a trade repository. In the case of CDS, the 
information can be obtained from the DTCC.  Some regulators (notably in the UK 
and Spain) collect data on OTC derivativ es through daily transaction reporting from 
market participants in their jurisdiction. They can also addre ss ad hoc requests to 
market participants in their jurisd iction or via the CESR Memorandum of 
Understanding for other markets. However,  it appears from the contacts that the 
Commission has had recently with the DTCC that most regulators do not seem until now to have routinely request ed transaction reports on CDS.  This could be explained 
by the fact that regulators have only starte d looking at CDS issu es recently and not 
yet established systematic procedures to use DTCC data. In addition, DTCC has only 
recently increased the accessibility to its data. Finally, the information stored by 
DTCC deals with positions and not transactions. There is for instance no time stamp of transactions stor ed in the warehouse. 
Due to the lack of disclosure requirements, there is also a risk of information 
asymmetries between informed short se llers and other less informed market 
participants. The disclosure of significant short positions to the market provides information to other market participants  about the price movements which short 
sellers expect and this coul d improve the efficiency of price discovery if correctly 
                                                
 
89 Khan, Moffazar and Lu, Hai, Do Short Sellers Front-Run Insider Sales? , MIT Working paper, find 
"significantly positive abnormal short sales in the days leading up to large insider sales, and peaking on 
the day of large  insider sales" and they conclude that this "is consistent with front-running facilitated by 
leaked information". 
90 This risk of market abuse arises because the naked short seller is not constrained by the need to identify 
and borrow shares from the market before shorting them; this means that naked short sellers can sell as 
quickly as they can find buyers and can even sell mo re shares than the total issued share capital of a 
company. Naked short selling can therefore more easily give a false impression of  the supply of shares 
for sale since the seller does not have to borrow them before the sale; although it should be noted that 
naked short selling without any intention or reason able plan to settle the short position might be 
considered to be market abuse that is already prohibited under the Market Abuse Directive. For 
example, in one case in the UK, the competent authority took action against a party for market abuse for short selling 252% of the issued share capital of a company - See FSA DP09/1, p. 13. 
91 FSA DP09/1, February 2009, p. 11.  
92 Source: responses from national regulators to questionnaire by the Commission services. 
EN 30   EN interpreted. Transparency to the market w ould also ensure that more information 
about the opinions that investors hold on a particular security would be made 
available to all investors and issuers93. The disclosure of short selling information to 
the market also provides useful information as investors are then aware of the extent 
to which short selling is affecting the price of the security and also of the extent to 
which short sellers will later have to purch ase a similar number of securities to cover 
their short sale (again bearing in mind that short selling t ypically involves two 
transactions – a short sale and a subseque nt purchase of the equivalent number of 
securities). 
In summary, there is clear evidence of a l ack of transparency of data on significant 
short positions held by financial institutions, with fewer than half of Member States 
currently applying disclosure regimes and only one Member State operating a 
flagging regime. The current lack of transpar ency in relation to short selling data can 
also be seen from the difficulty in obtaining reliable data for the EU. This lack of transparency is also one of the main con cerns of regulators w ith regard to short 
selling, as it prevents them  from being able to detect at an early stage the 
development of positions which may cause risks to financial stability or market 
integrity. The concern of regulators is so great that they have already agreed on a model for a disclosure regime within CE SR. Regulators also ta ke the view that 
disclosure to the public woul d deter aggressive short se lling, which could reduce the 
risks of negative price spirals. Issuers would welcome the disclosure of short 
positions in their share capital as it enable s them to be informed about the market 
view of their performance and prospects.  Finally, the fact that in response to 
concerns about lack of transparency, Member  States have had different transparency 
rules in place and have not to date all implemented CE SR's recommended approach 
to disclosure, results in a fragmented re gulatory framework, and consequently higher 
compliance costs and potential for regul atory arbitrage (see problem 4 below). 
3.6. Problem 4: Increased compliance costs and potential regulatory arbitrage 
arising from a fragmented regulatory framework  
The divergent responses of Member States to  issues relating to short selling pose the 
risk of regulatory arbitrage, as investors c ould seek to circumvent restrictions in one 
jurisdiction by carrying out transactions in  another. This regulatory fragmentation 
will also lead to increased compliance costs for market participants, especially those 
operating on several markets, who will have to set up different systems to comply with different requirements in different Member States.  
As it has been referred to above, EU Memb er State regulators  adopted divergent 
approaches to the regulation of short se lling in autumn 2008, ranging from temporary 
emergency bans on short selling of financia l stocks to partial bans on naked short 
selling and to no action at all. Some Me mber States adopted temporary emergency 
measures restricting or banning short selling in financial institutions (e.g. Austria, Denmark, France, Germany, Ireland, Italy, Netherlands, UK), whereas others (e.g. 
Finland, Sweden) adopted no rules on short selli ng at all in response to the crisis. Of 
the Member States which restricted or banne d short selling in financial institutions 
temporarily in 2008, some (e.g. Austria, Denmark and France) still have those 
                                                
 
93 FSA DP09/1 (February 2009), p. 24. 
EN 31   EN measures in place today. Furthermore, so me Member States banned only naked short 
selling in certain financial institutions (e.g. Belgium, France, Luxembourg, Portugal) 
or in all issuers (Greece), while another already had a ban on na ked short selling in 
place (Spain). Some Member States subsequently introduced short selling disclosure requirements with thresholds  varying from 0.01% to 0.25% of the total share capital 
of the issuer and Greece and Poland introduced flagging regimes.  
Detailed evidence on the current fragmented regulatory landscape is displayed in 
Annex 3. 
In its consultation of regulators, DG Intern al Market asked whether they perceived a 
risk of regulatory arbitrage arising from the different regulatory responses to short 
selling in Europe. Of the respondents, six saw possible risks of regulatory arbitrage, 
6 did not feel this was a realistic prospect and one thought it would depend on the 
circumstances. For one regulator, for the regul ation of short selling to be effective it 
must have extra-territorial reach or it could easily be circumvented by those 
undertaking short selling outside the jurisdiction
94.  
As pointed out by one regulator  in its response to a Co mmission questionnaire, if a 
company is listed in different Member States, it is potentially possible to take advantage of the different regulation c oncerning short selling, and the opportunities 
for regulatory arbitrage are greater for bonds , in particular sovereign bonds (although 
this may partly depend on the costs incurred in changing trading venues)
95. Another 
example would be that if one Member Stat e introduces a nationa l ban on short selling 
in its financial institutions, i nvestors might be tempted to sh ort sell shares in financial 
institutions of a closely re lated neighbouring country as a proxy in order to continue 
to profit from the expected decline in financial shares96.  
This regulatory fragmentation will lead to increased compliance costs for market 
participants, especially those operating on se veral markets, who would have to set up 
different systems to comply with different requirements in different Member States.  
According to some market participants, in addition to increased costs, the different 
national responses to short selling since September 2008 led to a significant increase in legal uncertainty due to  the lack of harmonisation, and to scope for regulatory 
arbitrage
97.  
The fragmented approach at national level also created difficulties and costs for 
market participants (many of whom operate  businesses across Europe) in identifying 
and interpreting the different requirements, with the exemption of market makers in 
                                                 
94 Source: responses by national regulators to questionnaire by the Commission services. 
95 Source: responses by national regulators to questionnaire by the Commission services. 
96 On 20 May 2010, the Dutch parliament adopted a motion calling for a similar ban on naked short 
selling as that introduced by Germany due to fears th at it created "the danger  that [speculators] are 
diverted to the Netherlands", Financial Times, Dutch Parliament calls for short selling ban , 21 May 
2010. 
97 European Financial Management Association (EFAMA), Reply to CESR's Call for Evidence on 
Regulation of Short Selling by CESR Members, January 20 2009. EFAMA considers that the divergence 
created regulatory arbitrage possibilities "due to th e many differences in the short selling regimes and 
the cross-border nature of equity markets", which sometimes caused "distortions that negatively 
impacted the trading in sp ecific shares or markets".  
EN 32   EN particular causing difficulties98. It also created significant costs for participants in 
setting up trading and reporting systems th at could comply w ith the differing 
requirements99.  
In addition to unanimous support of regulat ors within CESR fo r an EU-wide short 
selling disclosure regime, most national regulators ha ve also expressed strong 
support for a coordinated European appro ach to the powers of regulators on short 
selling in exceptional situtations100.  
To summarise, the problem of fragment ed national rules on short selling is a 
significant problem at the Eur opean level, which cannot be  addressed at the national 
level alone. Action to coordinate nati onal responses is based on evidence of 
regulatory developments which are expect ed to affect market developments 
unfavourably. 
3.7. How would the problem evolve without EU action? The Baseline Scenario  
As outlined above, a number of Member Stat es have already taken national action to 
restrict or ban short selling in distre ssed markets, and one Member State has 
introduced temporary restrictions on nake d CDS. This suggests that even in the 
absence of EU action, at least some Member States consider that they have the power 
to act, and have done so. On the other hand, the actions taken by some Member States (e.g. the UK) with regard to s hort selling restricti ons and disclosure 
requirements in an emergency were based on the Market Abuse Directive, which does not offer sufficient legal certainty and cl arity for this purpos e, since it does not 
contain any specific provisions on short se lling. In addition, some Member States 
(e.g. Italy) have indicated that they woul d prefer a coordinate d approach to the 
regulation of short selling at EU level. The existence of diffe rent and changing 
national rules on short selling would imply additional compliance costs for investors 
operating in several EU markets, such as  legal costs in identifying the different 
national rules and setting up or updati ng compliance processes for these.  
In addition to the possibility of action by national regulators, many stock exchanges 
already have the ability to suspend tradi ng in a particular share whose price has 
                                                
 
98 Emilios Avgouleas, A new framework for the global regulation of short sales: Why prohibition is 
inefficient and disclosure insufficient , University of Manchester School of Law, p. 18: "The market 
maker exemption was a source of particularly seriou s problems. Most Member States either did not 
have any market maker exemption or uniform definition about the kind of market actors that qualified as market makers. Arguably, the whole episode sh owed in the most vivid manner how the lack of 
harmonisation of trading rules keeps the EU from achieving the objective of 'level playing field', 
arguably the holy grail of EU securities regulation." 
99 The Association of British Insurers (ABI) said in its response to CESR's consultation on short sales: 
"The disparity of approaches taken not just in the EU but globally has represented a significant cost. For 
example, one large firm, which operates in several jurisdictions, reports that the annual legal and 
consultancy fees paid merely for identifying and tracking changes runs to tens of thousands of pounds." 
Association of British Insurers (ABI), Regulation of Short Selling by CESR Members – the ABI's 
Response to CESR 08/1010 . 
100 Source: discussion with national regulators (see annex 4) and individual responses by national 
regulators to questionnaire by the Commission services. 
EN 33   EN fallen by a significant am ount (circuit breakers)101, and so it could be  argued that no 
further regulatory intervention is require d. However, circuit breakers operated by 
stock exchanges only very briefly suspe nd trading in shares which breach the 
specified threshold. A degree of transparency on levels of short selling in particular 
instruments can be obtained through data on securities lending, which can be purchased from data providers. However, since short selling is  not the only reason 
for borrowing securities, the use of stock le nding as a proxy for leve ls of short selling 
presents uncertainties. 
Overall, if no action is taken at EU leve l the problems defined in this section are 
likely to remain without a coordinated respon se and to occur again in the future. In 
particular, in the event of a renewed sudde n and repetitive drop in the prices of 
sovereign bonds and the related CDS market, or of a future financial crisis, Member 
States are likely to continue to take di fferent approaches, without prior coordination, 
to exceptional measures to reduce the negati ve price spirals which can be associated 
with short selling in these situations. Ther e would be a risk of renewed stock market 
volatility as occurred following the decisi on of Germany to restrict naked short 
selling and naked CDS.  
With regard to transparency, some Member  States may impose national disclosure 
obligations as proposed by CESR  in the absence of EU legi slation; but it is likely to 
be only a minority of countries since natio nal competent authorities have agreed 
unanimously in CESR to urge the Commissi on to include these obl igations in an EU 
legislative framework. Therefore in the abse nce of EU or nationa l action to require 
disclosure of short positions to regulators and the market, regulators will continue to 
lack information on short selling transact ions and information asymmetries between 
short sellers and uninformed investors will persist. These transparency deficiencies imply potential risks for financial stability, as  well for investor protection and market 
integrity. 
Although believed to be small in Europe, se ttlement failures linked to naked short 
selling would also persist in the absence of measures to stre ngthen settlement 
discipline or require short sellers to locate or borrow shares prior to a short sale.  
In addition to the above-mentioned problems associated with the lack of a regulatory 
response at national level, there are also risks of over-regulation at national level. 
Unduly stringent rules on short selling risk  having a negative impact on liquidity and 
efficient price discovery. 
Overall, uncoordinated national responses (or the lack of nati onal actions) in the 
future are likely to lead to an unlevel playing field and oppor tunities for regulatory 
arbitrage, which could hinder the effectiv eness of national actions. If one Member 
State bans short selling of some or all fi nancial instruments on their market, investors 
could circumvent this ban by short selling the instruments if these are admitted to 
trading on markets in other Member States not subject to the ban.  
                                                
 
101 For example, the London Stock Ex change operates automatic executio n suspension periods which are 
designed to provide a pause in trading of approxim ately five minutes when a share price fall breaches a 
specified threshold, e.g. 5%.  
EN 34   EN Furthermore, the timing of a European measure is also relevant in this case. With the 
adoption of an early measure at EU le vel, national responses can be better 
coordinated, ensuring that market particip ants only incur compliance costs once. The 
longer it takes to propose a cl ear European initia tive, the more Member States may 
be expected to introduce uncoordinated national rules, leading to a potential 
multiplication of compliance costs for the financial industry in the respective 
markets.  
Finally, in the absence of EU action, the Eu ropean Union will continue to lag behind 
other countries, notably the Un ited States, in their regula tory response to the risks 
associated with short selling.  
3.8. Subsidiarity  
According to the principle of subsidiarity  (Article 5.3 of the TFEU), action on EU 
level should be taken only when the aims envisaged ca nnot be achieved sufficiently 
by Member States alone and can therefore, by reason of the scale or effects of the 
proposed action, be better achieved by th e EU. The preceding analysis has shown 
that although all the problems outlined above have important implications for each individual Member State, th eir overall impact can only be  fully perceived in a cross-
border context. This is because short selling a financial instrument can be carried out wherever that instrument is listed, or over the counter, so even in markets other than 
the primary market of the issuer concerne d. Further, the CDS market is by its very 
nature a highly cross-border, even international, market. Th erefore there is a real risk 
of national responses to short selling and CDS being circumvented or ineffective in 
the absence of EU level action. 
Further, certain aspects of this issu e are already partly covered by the acquis , 
notably: the Market Abuse Directive which prohibits short selling which is used to manipulate the market or in conjunction with  insider information; the Transparency 
Directive
102, which requires the disclosure of significant long positions; and the 
Markets in Financial Instruments Directive which imposes certain requirements on settlement discipline. Ther efore a proposal on short sell ing and these existing legal 
instruments should complement each other, and this can best be achieved in a 
common effort. Against this background EU action appears appropriate in terms of 
the principle of subsidiarity. 
4. O
BJECTIVES  
4.1. General, specific and operational objectives  
In light of the analysis of the risks and problems above, the general objectives of the 
legislative proposal on s hort selling are to:  
1. reduce the risks to fi nancial stability;  
                                                 
102 Directive 2004/109/EC of the Eu ropean Parliament and of the Co uncil of 15 Decem ber 2004 on the 
harmonisation of transparency requirements in relati on to information about issuers whose securities are 
admitted to trading on a regulated market and amending Directive 2001/34/EC, OJ L390/38, 31.12.2004 
EN 35   EN 2. reduce systemic risks; and  
3. reduce risks to market integrity arising from short selling; and 
4. prevent market fragmentation, thereby in creasing the efficiency  of the internal 
market.  
The main general objective, following the weight of the above problems, is to 
address the problem of market fragmenta tion. The other three ge neral objectives are 
based on the principle of risk prevention. However, it should be recalled that the 
prevention of market abuse is not specifically  linked to short selling and this issue is 
therefore dealt with in the context of the re view of the Market Abuse Directive rather 
than in this initiative.  
Reaching these general objectives requires the realisation of the following more 
specific policy objectives: 
(1) Reduce the risks of negative price sp irals arising from short positions 
(including those obtained through CDS); 
(2) Increase the transparency of short po sitions (including t hose obtained through 
CDS); 
(3) Reduce settlement risk linked with 'naked' short selling; and 
(4) Reduce the scope for regulatory arbitrage and compliance costs. 
The specific objectives listed above requi re the attainment of the following 
operational objectives: 
(1) Ensure regulators have clear power to re strict or ban short selling or CDS in 
distressed markets; 
(2) Ensure that regulators and markets obt ain data on short positions (including 
through CDS); 
(3) Ensure certain requirements are introduced at the point of trading and 
strengthen settlement discipline; 
(4) Ensure a coordinated response by EU Member States to short selling and 
CDS. 
An overview of the various objectives and thei r interrelationships is depicted in the 
figure 
EN 36   EN below.
 
EN 37   EN  
4.2. Consistency of the objectiv es with other EU policies 
The identified objectives are coherent with  the EU's fundamental goals of promoting 
a harmonious and sustainable development of  economic activities, a high degree of 
competitiveness, and a high level of consumer protection, which includes safety and economic interests of citizens (Article 169 TFEU). 
These objectives are also consistent w ith the reform programme proposed by the 
European Commission in its Communication Driving European Recovery .
103 More 
recently in the Commission Communication of 2 June 2010 on "Regulating Financial 
Services for Sustainable Growth" the Co mmission indicated that it would propose 
appropriate measures relating to shor t selling and credit default swaps104.  
5. POLICY OPTIONS  
In order to meet the object ives set out in the previ ous section, the Commission 
services have analysed different policy opt ions. The first section reflects the most 
relevant policy options that have been cons idered in order to ensure regulators have 
the power to restrict or ban short selling or CDS in distressed markets. The second 
section examines the policy options that have been analysed in relation to ensuring regulators and markets obtain data on shor t positions (includi ng through CDS). The 
third section studies the polic y options considered with regard to ensuring certain 
requirements at the point of trading and st rengthening settlement discipline. Finally, 
the fourth section considers the choice of instruments available to reduce regulatory 
arbitrage and compliance costs. 
As explained in section 3.7, a number of opt ions are not assessed below as they are 
being considered in the impact assess ments for other related initiatives. 
Where necessary, further explanation of the content of the options is included in the 
assessment of the options. In addition, an overview of the scope of the preferred 
options (with regard to the financial inst ruments covered) is included in annex 9. 
5.1. Policy options to ensure regulators have  the power to restrict or ban short 
selling or CDS in distressed markets 
(1) Option 1 – take no action at EU level. 
(2) Option 2 – introduce a power for na tional competent authorities to 
temporarily restrict short selling in a financial instrument admitted to trading 
on an organised market whose price has fallen by a specified quantitative threshold, e.g. 10% ('circuit breaker'). 
(3) Option 3 – introduce a rule that prohi bits short sellin g of a financial 
instrument admitted to trading on an organised market except at a price above 
                                                
 
103 Communication for the spring European Council, Driving European recovery, COM(2009)114. 
104 Page 7 of the Communication of 2 June 2010 from the Commission to the European Parliament, the 
Council, the European Economic and Social Committee and the European Central Bank. 
EN 38   EN the last traded price of the instrument, or at the last traded price if that price 
was higher than the price in the pr evious trade (an 'uptick rule'). 
(4) Option 4 - introduce a ban on 'naked CDS'  (i.e. entering into a CDS contract 
without having an underlying insurable in terest). This option is compatible 
with options 2 and 3. 
(5) Option 5 – grant national competent authorities the power to temporarily 
restrict or ban short selling of some  or all financial instruments or CDS 
transactions in case of an adverse event or development that creates a threat to 
financial stability or market confid ence ('exceptional situations'), with 
coordination by ESMA, in accordance with  article 6a(5) of Regulation ??/EC 
establishing ESMA and without prejudi ce to ESMA's powers under article 10 
of the same Regulation. This option is  compatible with options 2, 3 and 4. 
(6) Option 6 – introduce a permanent ban on  short selling of all financial 
instruments capable of being sold short.  This option is compatible with option 
4. 
(7) Option 7 - introduce permanent restrictio ns or ban on CDS. This option is 
compatible with options 2, 3 and 6. 
5.2. Policy options to ensure certain require ments at the point of trading and 
strengthen settlement discipline 
(8) Option 1 - take no action at EU level. 
(9) Option 2 - introduce a requirement that before entering into a short sale, a 
person must have borrowed the share, entered into an agreement to borrow 
the share or have other arrangements whic h ensure that he will be able to 
borrow the share at the time of settlement (locate rule) 
(10) Option 3 – introduce EU rules on set tlement discipline so that persons 
engaging in short sales which result in a failure to deliver face appropriate 
penalties, with buy-in procedures and fines in case of settlement failures 
(11) Option 4 - introduce a ban on naked short selling 
(12) Option 5 - exemption for market ma kers and certain primary market 
operations. This option is compatible with options 2, 3 and 4. 
5.3. Policy options to ensure regulators and ma rkets obtain data on short positions 
(including through CDS) 
(5) Option 1 - take no action at EU level. 
(6) Option 2 - introduce a system of flagging of short sale transactions so that 
regulators can identify which transacti ons are 'long' and which are 'short'. 
(7) Option 3 - notification of short positions to the regulator. This option is 
compatible with option 2. 
EN 39   EN (8) Option 4 - disclosure of short positio ns to the public. This option is 
compatible with options 2 and 3.  
(9) Option 5 - aggregated disclosure of short positions (i.e. individual short 
positions of investors are not disclosed). This option is compatible with options 2, 3 and 4. 
(10) Option 6 - disclosure of individual si gnificant net short positions. This option 
is compatible with options 2, 3 and 4. 
(11) Option 7 - exemption from disclosure requirements for market makers and 
certain primary market operations. This option is compatible with options 2-
6. 
5.4. Policy options to ensure a coordinated res ponse by EU member states to short 
selling and CDS 
This objective should be met by the above three categories of targeted options. In 
addition, the choice of legal instrument should also aim to ensure coordinated 
national responses. 
6. A
NALYSIS OF IMPACTS AND CHOICE OF PREFERRED OPTIONS AND INSTRUMENTS  
This section discusses the advantages a nd disadvantages of the different policy 
options against the criteria of their eff ectiveness in achieving the related objectives 
(to be specified for each bask et of options), and their effi ciency in terms of achieving 
these options for a given level of  resources or at least cost. 
The options are measured against the a bove-mentioned pre-defi ned criteria in the 
tables below. Each scenario is rated between "---" (very negative), 0 (neutral) and "+++" (very positive). The assessment hi ghlights the policy option which is best 
placed to reach the related objectives outlined  in section 5 and therefore the preferred 
one. 
6.1. Analysis of impact s of policy options 
6.1.1.  Policy options to ensure regul ators have the power to restrict or ban short selling or 
CDS in distressed markets 
These options will be assessed primarily ag ainst their effectiveness in achieving the 
specific objectives of: reducing the risks of negative price spirals arising from short 
positions, including those obtained thr ough CDS; and reducing the scope for 
regulatory arbitrage and compliance costs. Th ese policy options will also be assessed 
on their efficiency in achieving these objectiv es for a given level of resources or at 
least cost while avoiding unduly negative effects on market e fficiency. However, 
options will also be assessed agains t other objectives where appropriate. 
6.1.1.1 Option 1 - no action at EU level 
As explained in the problem definition, at least some Member States consider that 
they have the power to restri ct or ban short selling in ex ceptional situations, and have 
EN 40   EN done so. In addition, many stoc k exchanges already operate circuit breakers, and so it 
could be argued that no further regu latory intervention is required.  
However, this option has shortcomings. It  leaves scope for continued risks of 
negative price spirals  if some Member States do not ac t, also because circuit breakers 
operated by stock exchanges only very brie fly suspend trading in shares. Option 1 
also leaves scope for regulatory arbitrage and increased compliance costs, since in 
the absence of EU action, Member States will  continue to take divergent approaches, 
which could hinder the effectiveness of na tional actions. Finally, the existence of 
different and changing national rules on short selling would imply additional 
compliance costs for investors operating in seve ral EU markets, such as legal costs in 
identifying the different national ru les and setting up or updating compliance 
processes for these. 
6.1.1.2 Option 2 – introduce a 'circuit breaker' 
Under this option, which could apply to all financial instruments, a national 
competent authority would be given the pow er to temporarily prohibit short selling 
(until the end of the next trading day) in a financial instrument admitted to trading on an organised market whose price has falle n by a specified quantitative threshold. For 
shares, this threshold could be 10% as it is  in the United States. This threshold should 
be adapted for other financial instrume nts in implementing technical standards 
developed by ESMA and adopted by th e Commission, where appropriate in 
consultation with other con cerned regulators (e.g. for co mmodity derivatives). The 
regulator would be informed of the price fa ll by the trading venue , or by electronic 
market news sources. Prior to implemen ting the restriction the home competent 
authority would inform other competent authorities of count ries where trading 
venues admitted to trading the instrument c oncerned by the restrict ion, so that they 
could also implement the circuit breaker. ESMA would also be informed but could 
not block a competent authority's decision to  invoke the circuit breaker. However, if 
it were invoked repeated ly by several authorities this c ould be a signal to ESMA that 
longer lasting and more comprehensive excep tional measures might be required. This 
option is therefore an intermediate step which could be combined with a ban in exceptional situations (option 5). 
This option has some advantages when compared with option 1. First, it would 
partially achieve the objective of ensuring regulators have  the power to restrict short 
selling in distressed markets, by providing re gulators with a short term possibility to 
suspend short selling on the basis of an  objective price test, without needing to 
determine an exceptional situation. The sec ond advantage is that this would prevent 
short sellers from carrying out  further short transactions until the prohibi tion expired, 
which could (at least tempor arily) support the price of th e instrument and slow or 
stop a negative price spiral. Th e third advantage is that th e discretion left to the 
regulator to impose (or not) the prohibition in  the event of a significant price fall 
would allow the regulator to decide not to impose the prohibition if they considered 
that the price fall was due to fact ors unrelated to short selling. 
However, there are a number of disadvantag es to this option. First, there would be 
continued scope for negative price spirals, as the prohibition of short selling would 
only be for a very short peri od and would have to be re -imposed in the event of a 
further significant price fall. Second, if introduced in isola tion this option still leaves 
EN 41   EN room for regulatory arbitrage. By its nature a 'circuit breaker' is designed to halt the 
decline in the price of an instrument105 admitted to trading on an organised market, 
and such a measure would not prevent inve stors from circumve nting the prohibition 
of short selling on organised markets by secu ring a short position outside the market 
or through the use of derivatives.  
The evidence from published studies on the effectiveness of circuit breakers is 
mixed. On the negative side, according to  some studies, circuit breakers may cause 
volatility to be spread out ove r a long period of time instead of occurring in a one day 
jump, or may interfere with market liquidity106. On the positive side, some studies 
take the view that circui t breakers provide a cooling- off period for investors107. 
The views of respondents to the Commissi on's public consultation on the circuit 
breaker option were mixed, and a large number of respondents did not provide 
comment on this area. The majority of thos e who did noted that it could be a useful 
tool to slow a price fall amp lified by short selling, but that similar tools were already 
in place on exchanges and markets acros s the EU. No data was provided on the 
compliance costs linked to the circuit breaker option.  
6.1.1.3 Option 3 – introduce an 'uptick rule' 
The advantages of option 3 compared to opti on 1 are as follows. It would address the 
first shortcoming of option 1, as a short sa le transaction could only be entered at a 
higher price than the last tr ade price, which would limit the scope for negative price 
spirals to occur, without stopping short sel ling in a flat or a dvancing market. Also, 
unlike option 2, the prohibition of short selling is permanent, not temporary, so long 
as the short sale transaction is at a lower price than the last tr ade price. It would 
partially address the second shortcoming of  option 1, as a common uptick rule for all 
EU Member States would give a greater de gree of certainty on the regulatory regime 
for market participants. 
However, this option also has several disadva ntages. The tick rule has been criticised 
by some stakeholders for being ineffective as it only temporarily decelerates price 
declines108. In the United States, which operated a tick rule for nearly 70 years, this 
rule was abolished by the SEC in 2007 on the grounds that it modestly reduced 
liquidity and did not appear necessary to prevent manipulation109. Furthermore, like 
option 2, if introduced on its own a tick rule would leave scope for regulatory 
arbitrage through the use of derivatives to secure an economic short position, as a tick rule only applies to short transactions on cash markets.  
Most empirical studies are critical of the effectiveness of uptick  rules, arguing that 
they were ineffective in preventing price declines or that the price behaviour of 
                                                
 
105 In fact in the United States, the 'revis ed uptick rule' only applies to shares.  
106 For a review of the published literature on this  issue see Gruenewald, S, Wagner A, Weber R, Short 
selling Regulation after the Financial Crisis – First Principles Revisited , University of Zurich, 2009, p. 
37. 
107 Ibid, p. 37. 
108 Financial Services Authority, FS09/4,  Short Selling: Feedback on DP09/1 , October 2009, p. 11. 
http://www.fsa.gov.uk/pubs/discussion/fs09_04.pdf   
109 See SEC press release: www.sec.gov/news/press/2007/2007-114.htm   
EN 42   EN securities subject to an uptick rule was not substantially different to those not subject 
to such a rule.110  
6.1.1.4 Option 4 – ban 'naked CDS' 
This option would permanently prohibit inve stors from entering into a CDS contract 
unless they held an underly ing insurable interest. This  option only concerns CDS 
contracts without an underlying insurable in terest, so it has a narrower scope than a 
short selling ban which would prohibit i nvestors from selling short any financial 
instrument. 
Option 4 has the advantage over option 1 that it may help to reduce the risk of 
negative price spirals in the bond markets linked to economic short positions obtained through naked CDS, thereby par tially fulfilling the fi rst specific policy 
objective. A common approach to banning na ked CDS would also partially address 
the second shortcoming of option 1 (regulat ory arbitrage and compliance costs) by 
partially harmonising the approaches of  Member States on the CDS aspect. 
However, option 4 has a number of potentia l risks and disadvantages. According to 
some academics, prohibiting naked posit ions in credit default swaps could 
dramatically impact the market, because if  the CDS market is reduced to hedgers 
only, market liquidity is likely to drop substantially
 111. There is also the risk that 
regulation of the CDS market could also have some side effects on the bond market. 
Under a naked CDS ban, CDS might become mo re like classical insurance devices, 
i.e. customised to closely-related exposure. This would reduce the market's ability to trade credit risk and make proxy-hedging
112 impossible. As a resu lt, the cost of bond 
market financing for the broa der economy could increase. 
Another potential disadvantage of a ban on naked CDS is that there is a question 
mark as to whether this would be effectiv e in achieving the objective of reducing the 
risk of negative price spirals in the bond market. According to some market 
participants and regulators,  there is no clear evidence that trading on the CDS 
markets can distort or manipulate the underlying bond market, although some 
regulators argue that there is a risk that  trading on the CDS market can lead to 
instability on the underlying bond market.113  
                                                 
110 For an overview of empirical studies on uptick rules see Avgouleas, Emilios, A new framework for the 
global regulation of short sales: why prohib ition is inefficient and disclosure insufficient , Stanford 
Journal of Law, Business and Finance, Spring 2010, p. 55. 
111 Rene Schultz Journal of Economic Perspective Winter 2010 
112 Proxy hedges are hedges which co ver a non-deliverable obligation that is sufficiently correlated with 
the deliverable obligations. Examples would be using sovereign CDS to hedge exposure to banks or corporates in the same jurisdiction or to hedge exposure to other sovereigns, for which no sovereign 
CDS are traded. Since CDS are a synthetic market , it would of course be possible for market 
participants to write CDS contracts on any "exotic " reference entity. Since market liquidity for that 
contract would be low, however, the CDS seller woul d require a significant pr emium beyond the credit 
risk. Therefore, proxy-hedging may be less precise but cheaper. 
113 Responses to DG MARKT Public Consultation on Short Selling. A number of respondents, including 
the Association of British Insurers, Danish Central Bank, UK Finance Ministries Joint Submission and 
the London Stock Exchange Group, noted that ther e was no clear evidence to support such a ban. The 
Banque De France also commented that they were not in favour of a ban, and noted the differences in 
correlation across the sovereign CD S/Bond market. The German Federal Ministry of Finance, AMF and 
CNMV noted that they believed there was such a correlation. 
EN 43   EN Moreover, concerns about the possible damaging effects of a ban on naked CDS 
have to be taken with care as there is no certainty about  the positive impact of CDS 
on the accuracy of pricing on the bond markets. Empirically, this issue has been studied for corporate debt by Ashcraft and Santos (2009) with mixed findings.
114 The 
authors do not find evidence that the aver age firm on which CDS are traded has 
benefited from a reduction in the credit spreads that it  pays to issue in the bond 
market or to borrow from banks. However, there is evidence that the onset of CDS 
trading has increased the cost of debt fina ncing for the riskier firms as well as those 
that are more informationally opaque. In contrast, safer and more transparent firms experience a small reduction in the spread s after their CDS st arted to trade. 
For sovereign CDS, no similar study ex ists. As the assessment of sovereign 
creditworthiness by and large rests on public information, reduced screening 
incentives through CDS should play only a minor role. However, rather opaque 
public accounts have been important in the recent sovereign debt crisis.  
Finally, this option has the disadvantage that  if it were to be adopted in isolation 
there would be a risk of regul atory arbitrage, as there are other strategies than naked 
CDS to bet on a downturn on sovereign or co rporate risk which would also need to 
be addressed in order for any ban to be effective: selling a future on the bond, buying a put option, selling a call op tion, or short selling the bond.  
Overall, there are very varied views on how the bond market would be affected by a 
ban on naked CDS. 
Most respondents to the public consulta tion who addressed th is option in their 
contributions opposed a ban on naked CDS,  arguing that there was insufficient 
evidence to suggest naked CDS positions had been used in an abuse manor. On the 
contrary, a number of fina ncial and non financial institu tions (e.g. manufacturers) 
cited the use of proxy-hedging as critical to  the effective management of financial 
and non financial risks. 
6.1.1.5 Option 5 – power for national regulators to te mporarily restrict or ban short selling or 
CDS in exceptional situations (coordinated by ESMA) 
Under this option, national competent authori ties would, in case of an adverse event 
or development that creates a threat to financial stability or market confidence 
('exceptional situations'), be granted a clear  power to temporaril y restrict (e.g. by 
banning naked short selling or na ked CDS) or ban short sell ing or limit other similar 
transactions. A national competent au thority could invoke these powers of 
intervention if it considered it necessary in the event of adverse developments which constituted a serious threat to financial st ability or to market confidence in the 
Member State, another Member State or th e Union. The scope of the power would be 
broad, covering any financial instrument, to provide flex ibility to regulators to 
respond to an exceptional situation. Th e Commission would further specify the 
criteria for determining an exceptional si tuation by means of a delegated act, which 
gives the European Parliament and the Counc il the possibility to object and prevent it 
from entering into force. 
                                                
 
114 Ashcraft, A. and Santos, J. (2009), Has the CDS market lowered the cost of corporate debt? , Journal of 
Monetary Economics, 56, pp. 514-23. 
EN 44   EN To ensure coordination, ES MA would have to be not ified not less than 24 hours 
before (unless there were exceptional circumstances) and ESMA would then issue an opinion. In this opinion, ESMA would stat e whether it considers that adverse 
developments have arisen which constitute a serious threat to financial stability or to market confidence in a Member State or  the Union, whether the measures are 
appropriate and proportionate to addre ss the threat and whether the proposed 
duration of the measures ar e justified. Where ESMA concludes that the action is 
justified, it would also state whether action by other competent authorities is 
necessary. The opinion would be publishe d on ESMA's website. If a national 
regulator then wished to continue with action contrary to ES MA's opinion, it would 
have to publicly explain its decision. The short notificati on period and the possibility 
for Member States to give less notice in  exceptional circumst ances would ensure 
coordination while enabling competent authorities to act quickly in fast-moving situations.  
Consistent with an amendment to the ES MA Regulation adopted in first reading by 
the European Parliament
115, ESMA itself would be give n the power of intervention 
on short selling where an exceptional situation arose in a Member State or the Union which had cross-border implications and a co mpetent authority or authorities had not 
already taken action, or taken sufficient action. If the threat  was particularly serious, 
ESMA could intervene without first i ssuing an opinion. The same notification 
requirements would apply to ESMA. Restricti ons in an exceptional situation could be 
applied for up to 3 months and, if justifie d, could be renewed for further periods of 
the same duration, and ESMA would ensure  that the renewal would not exceed the 
period which was justified and proportionate. 
This option has a number of advantages . First, by providing regulators with the 
power to act in distressed markets it would also achieve the first specific objective of 
reducing the risk of negative price spirals. It would be more effective than options 2, 
3 and 4 in fulfilling the first operational objective, since it would ensure that 
regulators would be granted the power to restrict or ban short selling or CDS in 
exceptional situations. Second, since the power to restrict or ban short selling or CDS 
would be confined to such exceptional situations, any possible negative impacts on 
market efficiency of such a ban would be  limited to the duration of the threat to 
financial stability or market confidence, wh ich would contribute to achieving general 
objective 4 (prevent market fragmentation/e nhance efficiency of internal market).  
Third, if ESMA were to be granted the power  to ensure that the actions of regulators 
in exceptional situations were coordina ted and consistent, this would meet 
                                                
 
115 Article 6a(5) of the ESMA Regulation as adopted by the European Parliament says that "the Authority 
may temporarily prohibit or restrict certain financia l activities that threaten the orderly functioning and 
integrity of financial markets or the stability of the whole or part of the financial system in the Union in 
the cases specified and under the conditions laid down in the legislative acts referred to in Article 1(2) 
or if so required in the case of an emergency situ ation in accordance with and under the conditions laid 
down in article 10. The Authority may also assess the need to prohibit or restrict certain types of 
financial activities and, where there is such a need, inform the Commission in order to facilitate the 
adoption of any prohibition or restriction. The authority  shall review its decision at appropriate intervals 
and at least every three months. If the decision is not renewed after those three months, it shall automatically expire. A Member State can appeal against the decision of  the Authority. In that case, the 
Authority shall decide in accordance with Article  29(1) subparagraph 2, whether it maintains its 
decision."  
EN 45   EN operational objective 4 and reduce the scope  for regulatory arbitrage (specific 
objective 4). This option would increase the effectiveness of national actions, since 
regulators would be required to cooperate w ith each other to enfo rce the measures. It 
would also reduce compliance costs as mark et participants would have to comply 
with coordinated measures across the EU in  an exceptional situation, rather than a 
patchwork of different national responses. 
The first disadvantage of this option is th e potential for negative impacts on market 
efficiency. A study by Beber and Pagano whic h analysed short se lling bans around 
the world between 2007 and 2009 concluded that bans and constraints on short 
selling were "detrimental for market liqui dity" and may not have  the intended effect 
of supporting market prices116. A temporary ban could also have negative 
implications for efficient price discovery: an analysis of shor t selling data and 
restrictions in 46 markets across the world by Bris et al concludes that "markets 
where short sales are allowed are more e fficient because bad news appears to be 
more rapidly impounded into prices."117 However, these impacts would only last for 
the duration of any temporary restrictions or  bans on short selling or CDS, and have 
to be balanced against the benefits which such restrictions coul d bring in terms of 
reducing the risk of negative pri ce spirals in distressed markets. 
The second disadvantage is the cost for market participants of compliance with a 
ban, which would include, for example, le gal advice and adjustments of IT systems 
to prevent short selling of the instruments concerned. The FSA conducted a cost benefit analysis of its temporary ban on short selling of shares in UK financial 
institutions in 2008, and estimated the one-off compliance costs to be GBP 40,000 per firm and the ongoing costs to be GBP 6,500 per firm per month.
118 On the other 
hand, ongoing costs would only last for as long  as the ban was in place, and these 
costs also have to be weighed against the reduced risk of negative price spirals which 
this option could bring. 
The other main disadvantages of this option is , that if ESMA were not in practice to 
have the ability to ensure real and effective coordination and consistency in national measures taken in exceptional situations, there would be a risk of continued regulatory arbitrage and higher compliance co sts for market participants, similar to 
the second shortcoming of option 1. Ho wever, since the coordination powers 
foreseen for ESMA under this option are extensive and would be without prejudice 
to its powers under article 10 (emergency pow ers) of the ESMA Regulation, this risk 
is limited as ESMA could always act itself or  invoke article 10 to ensure that national 
regulators took the same ac tion in an emergency.  
Most responses to the public consultati on favoured this option as they felt limiting 
restrictions to exceptional situ ations would be a strong signa l to the market and act as 
a damper to mitigate speculation. There was also support from market participants 
for the clear definition of an exceptional situation, which would help maintain market 
                                                
 
116 Beber, Alessandro and Pagano, Marco, Short-Selling Bans around the World: Evidence from the 2007-
09 Crisis , CSEF working paper, 2010, p. 27. 
117 Bris, Arturo, William N. Goetzmann,  W.N., Zhu, N., Effici ency and the bear: Short sales and markets 
around the world, 2007, Journal of Finance, Vol 62, No 3, p. 28. 
118 FSA DP09/1 (February 2009), annex 3, p. 2.  
EN 46   EN clarity and confidence. On the other hand, public aut horities mostly argued for 
flexibility in determining an exceptional situation. 
6.1.1.6 Option 6 – permanent ban on short selling 
This option would mean that investors would be banned permanently from short 
selling financial instruments, either thr ough short selling on cash markets or through 
the use of derivatives to s ecure a net short position. 
The main advantage of a permanent ban on short selling would be that it would 
eliminate the potential for the risk that  short selling may amplify negative price 
spirals in distressed markets, as well as the risk of settlement failures linked to naked short selling. If short selling were to be  banned, there would not be a need for a 
disclosure regime for shor t positions, and a total EU-w ide ban would rule out the 
possibility of regulatory arbi trage in Europe and additi onal compliance costs caused 
by differing national rules. 
However, there would clearly be major costs associated w ith this option. The 
economic costs (in terms of market liquidity  and price efficiency) outlined for option 
5 would be even greater under this opti on, as the ban would be permanent, not 
temporary. Similarly, the ongoing compliance co sts would be greater than for option 
5 as they would not be limited in time (although one-off costs would only have to be 
incurred once, whereas in a temporary regime these would recur with each new restriction). This option would therefore not meet the objective of avoiding unduly 
negative effects on market efficiency. 
Further, since most other countries do not have a permanent ban on short selling in 
place, there would be a risk that such a m easure might lead to challenges before the 
World Trade Organisation, or to economic retaliation by other countries opposed to 
this approach. There would also  be a risk that the attractiveness of Europe as a base 
for financial institutions would be reduce d, and that over time they might opt to 
locate themselves in jurisdictions which gave them greater freedom in their 
investment strategies
119.  
Only two of the 116 responses to the pub lic consultation supported a full ban on 
short selling.120  
6.1.1.7 Option 7 – permanent restrictions or ban on CDS 
The advantage of this option is that it w ould eliminate the potential for CDS to be 
used to secure an economic short position in the underlying reference instruments, and would therefore further reduce the sc ope for negative price spirals in those 
instruments. Like option 6 it would eliminat e the need for a transparency regime for 
economic short positions obtained through CDS. 
                                                
 
119 In the response of the Alternative Investment Managers Association (AIMA) to a questionnaire by the 
Commission services, one hedge fund argued that a ban on short selling through the use of derivatives 
would force it to move outside the EU, and another argued that listings and trading would move to the US and Asian markets. 
120 Responses to DG MARKT Public Consultation on Short Selling. Stellungnahme des Deutschen 
Gewerkschaftsbundes and John Chapman. 
EN 47   EN However, this option has similar disa dvantages to option 6. There would be 
considerable economic costs to this measure,  as institutions would no longer be able 
to hedge credit risk through CDS or take positions for a profit. The ongoing compliance costs would be greater than for option 5 as they would not be limited in 
time. Since the CDS market is a highly global one, a ban could easily be circumvented by investors trading in CDS in  non-EU countries not subject to the ban 
and there would be very little that EU regulators could do about this.  
6.1.1.8 The preferred options 
 Impact on stakeholders Effectiveness Efficiency 
Option 1 (baseline) n.a. n.a. n.a. 
Option 2 
(circuit breaker) (++) regulators obtain possibility to 
temporarily ban short selling and have 
discretion not to ban 
(++) issuers gain a mechanism to 
temporarily support their share price 
when it faces a significant decline 
(-) financial institutions engaging in 
short selling are briefly restricted from 
doing so and face compliance costs (++) partially achieves 
specific objective 1, but 
prohibition only for a short 
period  
(-) regulatory arbitrage: 
could be circumvented by 
derivatives 
 (-) compliance costs for 
investors; any effect on 
liquidity would be 
temporary 
 
Option 3 
(uptick rule) (+) regulators have an ongoing 
automatic mechanism  
(+) issuers gain an ongoing, automatic 
mechanism to support their share price  
(- - ) financial institutions face 
compliance costs and are permanently 
restricted form short selling (+) partially achieves 
operational objective 1 as it 
restricts short selling in a 
falling marke 
(-) could be circumvented by 
derivatives (- --) compliance costs; 
could reduce market 
liquidity 
Option 4 
(ban on naked CDS) (+) regulators gain a tool to eliminate 
risk of negative price spirals on bond 
markets linked to naked CDS 
(0) governments benefit from possible 
reduced volatility on sovereign bond markets, but risk of negative side 
effects on liquidity 
(- - -) financial institutions lose a way 
of taking negative positions on bond 
markets through CDS (-) partially achieves 
operational objective 1 for 
bond markets, but 
effectiveness questionable. 
Could be circumvented by using other derivatives or trading CDS outside EU (- - -) could 
substantially reduce 
liquidity of CDS market 
and could have 
negative side effects on 
bond markets 
Option 5 
(power for national 
regulators to ban 
short selling/CDS in 
exceptional 
situations, subject to 
ESMA coordination) (+++) ensures regulators gain powers 
to ban short selling/CDS in exceptional 
situations  
(++) issuers gain comfort of knowing 
that their share price can be supported 
by a temporary ban on short selling in 
distressed markets 
(0) governments benefit from possible 
reduced volatility on sovereign bond markets, but risk of negative side 
effects on liquidity 
(- -) financial institutions engaging in 
short selling may be prevented from 
doing so in exceptional situations for several months (+++) achieves operational 
objective 1 fully and reduces risk of negative price spirals 
arising from short positions; ESMA coordination 
eliminates risk of regulatory 
arbitrage (-) reduced compliance 
costs compared to other options due to 
coordinated EU approach. Temporary 
restrictions in 
exceptional situations avoid unduly negative 
impacts on market 
efficiency, although temporary restrictions 
on CDS could have 
negative side effects on 
bond markets. 
Option 6 
(permanent ban on 
short selling) (-) regulators lose discretion to only 
ban short selling in exceptional 
situations 
(++) share prices of issuers would be 
supported, but this could lead to them 
being artificially inflated  
(- - -) financial institutions prevented 
from short selling permanently (+) partially achieves 
operational objective 1, since 
ban would not be discretionary and restricted 
to distressed markets. Rules 
out regulatory arbitrage. (- - -)Permanent costs 
in terms of reduced 
market liquidity and efficient price 
discovery. Ongoing 
compliance costs. Risk 
of firms relocating. 
Option 7 
(permanent ban on 
CDS) 
 (-) regulators lose discretion to only 
ban CDS in exceptional situations 
(0) governments benefit from possible 
reduced volatility on sovereign bond 
markets, but risk of negative side (+) partially achieves 
operational objective 1, since 
ban would not be 
discretionary and restricted 
to distressed markets. Could (- - -) substantial costs 
as firms lose ability to 
hedge credit risk and 
could have negative 
side effects on 
EN 48   EN  effects on liquidity 
 be circumvented by using 
other derivatives or trading CDS outside EU sovereign bond 
markets 
 
Based on the analysis above, the highest sc oring option is option 5, granting a power 
for national regulators to temporarily restrict or ban short selling or CDS in exceptional situations (coordi nated by ESMA). However, op tion 2 also scores well 
and is compatible with option 5. In fact, if option 2 were to be combined with option 5, this would address the shortcomings of option 2: that short positions using derivatives are not captured, and that the halt  to short selling in the event of is only a 
very short term one (until the end of the next trading day). A combination of the two 
options would give regulators an instru ment to impose a short term ban on short 
selling on organised markets in the event of a significant price decline, as an 
intermediate step based on an objective price test, as well as the possibility to impose 
a temporary ban of a longer duration, capturi ng derivatives as well, in the event of an 
adverse event or development which posed a threat to financial stability or market 
confidence. So the preferred option is  a combination of options 2 and 5. 
With regard to the circuit breaker, the sc ope should cover all financial instruments, 
but the threshold of 10% would apply only for shares, whereas thresholds for other 
financial instruments would be adapted to each instrument in implementing technical standards adopted by the Commission on the advice of ESMA. With regard to the 
broader powers of regulators in exceptional situ ations the scope should extend to all 
financial instruments that may be sold short, as well as CDS, to provide the 
necessary flexibility for regulators in unforeseen situations.  
6.1.2.  Policy options to ensure certain requirements at the point of trading and strengthen 
settlement discipline 
These options will be assesse d against their effectiveness in achieving the specific 
objectives of reducing settlement risk li nked with naked short selling, and reducing 
the scope for regulatory arbitrage and comp liance costs. These policy options will 
also be assessed on their efficiency in achie ving these objectives for a given level of 
resources or at least cost while a voiding unduly negative effects on market 
efficiency. However, options will also be assessed against other objectives where 
appropriate.  
6.1.2.1 Option 1 – no action at EU level  
As explained in the problem definition, the available data suggests that levels of 
settlement failures in Europe are relatively low, perhaps as a result of the existing obligations imposed on market operators by MiFID or national rules to strengthen 
settlement discipline. However, a number of Member States have imposed temporary or permanent restrictions on naked short selling because they perceive risks of 
settlement failure and price volatility, and in the absence of EU level action, these 
risks will persist. In addition, the current di versity of national re sponses to the issue 
would also continue, implying scope for re gulatory arbitrage and compliance costs 
for financial institutions opera ting on several EU markets. 
EN 49   EN 6.1.2.2 Option 2 - introduce a locate rule 
This option would involve imposing a requireme nt that before entering into a short 
sale, an investor would have  to either have borrowed th e security, entered into an 
agreement to borrow it or have other arrange ments which ensure that he will be able 
to borrow the security at the time of settlement. This is often known as a 'locate rule', 
as prior to carrying out a shor t sale transaction, the invest or has to either borrow the 
securities or locate them with a view to borrowing them before settlement.  
A locate rule has several advantages compared to the 'no EU level action' option. 
First, it would meet the objective of reduc ing the risks of settlement failures which 
naked short selling may cause, leaving ot her causal factors (e.g. administrative 
errors) to be dealt with by other mean s (regulatory or non-regulatory). Second, a 
locate rule would slow down the speed with which a short seller could execute his 
strategy, as he would have to first borrow or  locate shares to borrow entering into a 
short sale. More importantly, since there is always a limit to the quantity of securities available for lending, a locate rule would also place a limit on the volume of short 
selling of securities. Aggressive short te rm strategies which depend on placing a high 
volume of short sale orders very quick ly would therefore become much more 
difficult to carry out. This would have th e additional advantage of contributing to 
meeting the objective of reducing the risk of  negative price spirals arising from short 
positions.  
Third, introducing a harmonised locate rule at EU level would eliminate the scope 
for regulatory arbitrage as investors could no longer execute short sales in 
jurisdictions with little or no restrictions on naked short selling. It would also reduce 
compliance costs relative to the cost of the very different national requirements 
which currently exist for naked short selli ng, as institutions would only have to 
comply with one common obligation EU-wide.  
A potential disadvantage with this option is  that it could impose compliance costs, 
including legal costs and the cost of IT syst ems to ensure that sort sale transactions 
could only be executed once securities ha d been borrowed or located. However, 
these costs would be limited since most market  participants said in their responses to 
a questionnaire by the Commi ssion services that they al ready use arrangements to 
ensure securities are located prior to en tering into a short sale, and this option 
foresees that such arrangements could c ontinue to be used. The public consultation 
has not provided data on the compliance costs associated w ith existing restrictions on 
naked short selling.  
A disadvantage of a locate ru le would be that it could impose indirect economic costs 
on institutions which currently engage in nake d short selling. These costs in terms of 
reduced market liquidity and efficient pric e discovery would likely be lower than 
those for a ban on short selling, but some im pact could still be expected. However, 
the evidence gathered from the bilateral a nd public consultations carried out by the 
Commission suggests that the prevalence of naked short se lling, without any attempt 
to locate securities for borrowing, is quite limited.  
Another significant disadvantage would be if the rule did not contain appropriate 
exemption for firms engaged in market making activity which provide significant 
liquidity to the market and due to the nature  of their business need to take numerous 
EN 50   EN naked short positions throughout the trading da y. Requiring such participants to enter 
into agreements for the significant num ber of trades they enter into would 
significantly impair their ability to provide liquidity to the market. This would have a significant detrimental effect on markets.  
In summary, a locate rule could be consider ed to be a proportio nate response to the 
risk of settlement failure, as  the costs involved are likely to be limited since it would 
be building on an existing ma rket practice already used by many market participants, 
and an exemption could be foreseen for ma rket making activities so as to minimise 
any negative impact on the li quidity they provide. A harm onised EU requirement on 
a locate rule would also re duce the compliance costs for market participants relative 
to the different approaches currently follo wed by Member States in this respect. 
6.1.2.3 Option 3 – introduce EU rules on settlement discipline 
Under this option, trading venues or central c ounterparties would be required to have 
rules in place so that if a short seller was unable to deliver securities by the settlement date, procedures would be tr iggered to 'buy in' those securities for 
settlement after a specified period (which c ould be T+4), at the expense of the short 
seller. Further under this option rules coul d require trading venues or settlement 
systems to have in place appropriate measur es to fine particip ants who do not settle 
by the due date. Since the causes of settlem ent failures are broader than just naked 
short selling, under this option it is proposed  that there would be  only such level of 
harmonisation as is necessary to achieve the relevant objectives on short selling. 
More detailed harmonisation of issues such as settlement periods, buy in procedures 
and fining regimes would be addressed in  the forthcoming European Commission 
initiative on securities law, which will al so be subject to an impact assessment.  
The advantage of option 3 is that it would reduce the risk  of settlement failures 
linked with naked short selling by providing for buy-in procedures or fines in that 
situation, thereby meeting objective 3. Ho wever, unlike option 2, it would not in 
itself limit the speed with which investors could short sell, or the volume of short selling, as it would not introduce any re quirements at the point of trading. The 
discipline on investors would rather arise from the knowledge that if they did not 
have the securities to settle a short sale transaction, they would face the costs of the 
buy-in procedures and fines that would be  triggered. This would be a significant 
commercial deterrent against persons entering into short sales without having in place adequate arrangements to ensure  they can settle the transaction. 
As with option 2, option 3 would also reduc e the scope for regulatory arbitrage and 
compliance costs arising from different national rules on settlement failures linked with naked short selling.  
In terms of compliance costs, as many trad ing venues already have in place differing 
forms of buy in or fining arrangements  for late settlement, some level of 
harmonisation as foreseen by option 3 should not impose significan t additional costs. 
The public consultation provide d no data on possible cost s associated with this 
option. . 
EN 51   EN 6.1.2.4 Option 4 – ban on naked short selling 
This option would entail imposing a requireme nt that securities could not be sold 
short unless they had been borrowed and were  held by the seller before he entered 
into the short sale (a 'pre-borrow' requirement).  
A ban on naked short selling has similar advant ages to a locate rule: it would reduce 
the risk of settlement failures linked to nake d short selling to an even greater extent 
(although the evidence from Spain, which has such a ban, is that it would not 
eliminate settlement failures entirely). It w ould also restrict to a greater extent the 
ability of short sellers to short sell quickl y, as their ability to do so would be 
conditional on borrowing and act ually obtaining the borrowe d securities, without the 
flexibility offered by a locate rule to actually  borrow the securities after the short sale 
but before settlement. A harmonised ba n would also eliminate the scope for 
regulatory arbitrage. 
However, the costs associated with a ba n on naked short selling would be greater 
than those linked with a locate rule. Invest ors would face legal costs and would have 
to put in place systems to ensure that s hort sales were only entered into when the 
securities had been borrowed. 
The indirect economic costs of this option ar e also likely to be greater than for the 
locate rule. According to the economic litera ture, a ban on naked short selling would 
have similar effects in terms of reducing li quidity and efficient price discovery as a 
ban on short selling. 
As with a locate rule, if there were to be no exemption from a ban on naked short 
selling for market making activity, this w ould significantly impair their ability to 
provide liquidity to the market. 
6.1.2.5. Option 5 – exemption for market maki ng activity and certain primary market 
operations 
There are a number of important and es tablished market practices which are 
necessary for the efficient functioning of mark ets and where participants need to take 
covered or uncovered short positions to condu ct such activities. These activities are 
market making activities and specific prim ary market operations. This option would 
exempt these activities from certain requi rements for uncovered short selling (the 
locate rule), but not from the requirement s for settlement discipline (although these 
would be adapted for market making activ ities and primary ma rket operations). 
Under this option, market making activity would be defined as  the provision by 
financial institutions of liquidity on a regular and ongoing basis to the market by 
posting firm, simultaneous two-way quotat ions of financial instruments at 
competitive prices, or by fulfilling orders initiated by clients or in response to clients' requests to trade, and to hedge positi ons arising out of those dealings.  
The use of this exemption would be subject to a number of conditions to ensure that 
it is not abused. Under this option, only the market making activities of financial 
institutions who meet the criteria of this definiti on and who have notified the 
regulator 30 days beforehand of their inte ntion to make use of the market maker 
exemption, would be exempt from the requ irement on naked short selling considered 
EN 52   EN in this section. The competent authority th at receives a notification from a person 
wishing to use the exemption will be able to refuse to allow the person to use it if they believe the person does not meet the criteria for using the exemption. The competent authority will also be able to  request further information from persons 
using the exemption to ascertain if they  are complying with all conditions. The 
proprietary trading activities of financial institutions which also engaged in market 
making would not be exempt.  
Similarly, primary market dealers who have signed an agreement with an issuer of 
sovereign debt in order to provide assistan ce to the sovereign issuer for primary and 
secondary market operations relating to its so vereign debt would also benefit from an 
exemption from the requirements on naked short selling for these primary market operations. The exemption would also a pply to primary market operations by a 
person for the purposes of stabilisation unde r the Market Abuse Di rective. The same 
conditions would apply as outlined above.  
The option is consistent with principle 4 of the Internati onal Organisation of 
Securities Commission's (IOSCO) principles on short selling, which recommends that short selling regulation should cater for market transactions that are desirable for 
efficient market functioning and developmen t. According to IOSC O, activities that 
fall under this category include bona fi de hedging, market making and arbitrage 
activities; in IOSCO's view these activities generally provide benefits to the market 
and are unlikely to pose risks that will destabilise the market
121. 
This option is also in line with the advi ce of CESR and most responses from market 
participants to the consulta tion, who consider that market makers and primary market 
dealers fulfil an important and legitimate function in providing liquidity, and this 
liquidity would be affected negatively by applying disclosu re and other obligations to 
these activities.  
The rationale for this exemption is that wh en acting as market makers or performing 
primary market operations, these participants  will continually be required to take 
both long and short positions in a large numbe r of financial instruments in order to 
execute market making transactions to meet the demand from market users or to perform their primary market operations. Their positions are likely to change continuously for each financial instrument  and fluctuate between long positions to 
short positions. It is therefore not feasible to expect  such activities to enter into 
specific agreements for the large number of  transactions they undertake. To apply 
such a requirement would make it impossible for these activities to be provided and 
could have significant detrimental effect on markets including other investors and 
issuers.  
It is difficult to provide detailed estimate s of market making activity as increasingly 
traditional market makers are using new automated trading methods for their activities. Also it will vary from trading venue to trading venue. An estimate by one 
                                                
 
121 IOSCO Final Report on the Regulation of Short Selling, p. 19 
http://www.iosco.org/library/p ubdocs/pdf/IOSCOPD292.pdf] 
EN 53   EN exchange puts the level of market maki ng at 20-25% for the most liquid securities122. 
But this is likely to include some tradi ng that will not qualif y for the detailed 
definition of market making activities in the proposal. Therefor e the actual amount 
that is exempted is likely to be significantly less. Further, this is an estimate for the most liquid shares, figures for less liquid shares may also be lower. 
This option has the advantage that the objec tive of reducing the risk of settlement 
failure linked with naked short selling w ould be met, while avoiding the possible 
negative impact on liquidity that full appl ication of the proposed requirements for 
naked short selling could have on activitie s that are essential to the efficient 
functioning of markets. In part icular, issuers would continue  to obtain the benefits of 
liquidity provision for their financial in struments provided by market makers and 
primary market dealers, and financial institutions providi ng this service would be 
able to continue to do so. If approp riate exemptions or adaptations for market making 
activities from the above-mentioned obligati ons relating to naked short selling were 
not provided for, this would have a signi ficant adverse effect on their ability to 
provide liquidity to the markets. This w ould reduce liquidity significantly, resulting 
in wider spreads and affecting the prices and the ability of investors to purchase securities. This would in turn have a detr imental effect on issuers of the securities. 
Choosing this option would therefore greatly contribute to ensuring the 
proportionality of the measures concerning naked short selling. 
Similarly for certain primary market operatio ns participants need to take a short 
position (for example for stabilisation progr ammes and the issue of sovereign bonds). 
Failure to provide appropriate exemptions or  adaptations would re sult in direct and 
indirect costs for issuers w ho wish to raise funds thr ough the issue of securities. 
Another advantage of this option is that  objective 4 would also be achieved, as a 
harmonised exemption for market making, based on a common definition, would 
eliminate the scope for regulatory arbitrag e as all Member States would have the 
same definition. This would also entail lower compliance costs than the current 
situation where different Member States ap ply different regimes for market makers. 
This option has the disadvantage that theore tically, uncovered shor t sales carried out 
for market making activities may very occas ionally result in failures to settle. 
However, this is unlikely in practice as most short positions for market making are 
held very briefly and the objec tive of market makers is for these positions to be flat 
at the end of the day. Further, this theoretical risk would be mitigated by excluding market making activities a nd primary market operations from the conditions on 
naked short selling, while subjecting them to tailored rules for settlement discipline. 
For example, in the United States market ma kers are subject to buy- in procedures if a 
trade has not been settled 6 da ys after the trade (T+6), a more lenient period than the 
T+4 foreseen for other market participants. 
The other potential disadvantage of this opt ion is that some financial institutions 
might seek to use this exemption to circumvent the requirements on uncovered short selling for activities which do not in reality constitute market making. However, this 
                                                
 
122 London Stock Exchange Group in its response dated 9 July 2010 to the Commission consultation has 
indicated that in Q4 2009 approximately 20-25% of trading in FTSE 100 shares was by technical 
traders whose strategies may include market making activities.  
EN 54   EN risk is very limited as only genuine market making activities will be exempted; the 
risk can be mitigated by using the harmonised definition of market making activities recommended by CESR and by providing fo r the controls on the use of this 
exemption outlined above. In particular, those wishing to benefit from the exemption would have to notify the competent author ity in writing not less than 30 days in 
advance of their intention to use the exemption, and th e competent authority would 
have the power to obtain information from any institution benefiting from the 
exemption. 
6.1.2.6 The preferred options 
 Impact on stakeholders Effectiveness Efficiency 
Option 1 (baseline) n.a. n.a. n.a. 
Option 2 
(locate rule) (+++) regulators will be able to 
sanction naked short selling which 
does not comply with locate rule 
(+++) issuers gain comfort that 
number of shares sold short cannot 
exceed the number issued or available to borrow 
(+++) governments gain comfort that 
number of government bonds sold 
short cannot exceed the number issued 
or available to borrow 
(- ) some financial institutions may 
have to adapt their compliance systems, although most operate with a 
locate rule currently  (++) Objective of reducing 
settlement risk achieved in 
part by rules at the point of 
trading 
(+++) Objective 4: met in 
full 
(+) Contributes to reducing 
risk of negative price spirals 
 (-) limited impact in 
terms of ongoing 
compliance costs as many already operate 
such a rule; some 
impact on liquidity and efficient price discovery 
Option 3 
(introduce rules on 
settlement discipline) (+++) regulators gain comfort that 
settlement failures will be penalised 
(+++) issuers also obtain reassurance 
that settlement failures will be 
penalised 
(+++) governments – same benefit as 
for issuers, concerning bonds 
(-) financial institutions may face 
penalties or costs due to buy-in 
procedures but prefer this option (++) Objective of reducing 
settlement risk achieved in 
part by strengthening settlement discipline 
(+++) Objective 4 : met in 
full 
(+) Contributes to reducing 
risk of negative price spirals 
 (0 ) limited impact in 
terms of compliance 
costs;  
Option 4 
(ban on naked short 
selling) 
 (+++) regulators gain comfort that 
settlement failures due to naked short 
selling will be greatly reduced 
(+++) issuers also obtain reassurance 
that settlement failures due to naked 
short selling will be greatly reduced 
(+++) governments – same benefit as 
for issuers, concerning bonds 
(- - -) financial institutions' ability to 
short sell significantly impaired, 
imposing economic costs and ongoing compliance costs (++) Objective of reducing 
settlement risk achieved in part but settlement failures 
caused by other factors will 
persists 
(+++) Objective 4: met in 
full 
(+) Contributes to reducing 
risk of negative price spirals 
 (- - - ) significant 
negative impact on liquidity and efficient 
price discovery and economic/compliance 
costs for financial 
institutions 
 
Option 5 
(exemption for 
market making) (-) regulators may ha ve to ensure the 
exemption is not abused 
(+++) issuers and  
(+++) governments gain comfort that 
liquidity in their shares or sovereign 
bonds is not impaired 
(+++) financial institutions: their 
market making activities and primary 
market operations would be exempt (0) Objective of reducing 
settlement risk unaffected as 
short positions held by market makers are briefly held, and 
market makers and primary 
market dealers would be subject to settlement discipline 
(+++) Objective 4 met in full 
as a harmonised definition of 
a market maker/primary market dealer exemption would avoid regulatory 
arbitrage and limit 
compliance costs (+) compliance costs 
would be limited by 
harmonised exemption 
(+++) liquidity 
provided by market 
makers and primary 
market dealers would 
be unaffected 
EN 55   EN  
Based on the analysis above, the highest sc oring options in term s of effectiveness 
and efficiency are options 2 and 3, while option 5 scores highly in terms of efficiency. These three options are compatible with each other and so could be combined. If options 2 and 3 were combined, settlement discipline would be reinforced both by requirements at the point  of trading and by buy-in procedures and 
fines, thereby meeting very effectivel y the related operational objective. By 
combining option 5 with options 2 and 3, the potential negative impact on liquidity 
would be mitigated by a harmonised exempti on for market makers, and so would the 
potential for regulatory arbitrage and comp liance costs associated with different 
exemptions across the EU. Option 5 would also contribute greatly to ensuring the 
proportionality of the overall approach. 
So the preferred option is a combination of options 2, 3 and 5.  In terms of scope, these options should apply to shares and sovereign bonds only, 
consistent with the evidence of the problems raised and the positions expressed in the public consultation. However, market makers  and primary market dealers should not 
be exempt from rules on settlement discipline; these could be tailored to their situation, for example by providing for buy-in procedures for market makers at T+6 
as is foreseen in the United States. 
6.1.3.  Policy options to ensure regulators and markets obtain data on short positions 
(including through CDS) 
These options will be assesse d against their effectiveness in achieving the specific 
objectives of ensuring that regulators and markets obtain data on short positions, including through CDS, and reducing th e scope for regulatory arbitrage and 
compliance costs. These policy options will also be assessed on their efficiency in achieving these objectives for a given level of resources or at least cost while 
avoiding unduly negative effects on market ef ficiency. However, options will also be 
assessed against other object ives where appropriate.  
6.1.3.1. Option 1 – no action at EU level 
Some Member States have already introduced  disclosure obligations in the absence 
of action at EU level, and some others may impose them based on the CESR 
recommendations, but as explained in the ba seline scenario this is likely to be a 
minority. Therefore this option has the disadvantage that regulators and markets in a 
number of Member States may continue to  lack information on short positions. These 
transparency deficiencies imply potential ri sks for financial stability, as well as for 
investor protection and market integrity, becau se regulators will not be able to detect 
the build-up of short positions which may pose risks to orderly markets or be used for market abuse. This option will also m ean the continuation of divergent national 
approaches to disclosure, which leaves scope for regulatory ar bitrage and implies 
higher compliance costs for market participan ts operating in several markets subject 
to different rules. 
EN 56   EN 6.1.3.2. Option 2 – flagging 
Under this option, a share trading venue woul d be required to esta blish procedures to 
ensure that persons entering short sale or ders on the trading venue would have to 
mark those orders as shor t orders. The trading venue would then publish a daily 
summary of the volume of short orders. 
This option has several advantages over opti on 1. It would provide regulators with a 
tool to receive very preci se information about the volume of short transactions 
relative to long transactions. This would be very effective in achieving specific 
objective 2, as it would be ve ry transparent. This option also has advantages over a 
disclosure regime: importantly, according to  CESR it "has the potential to give 
regulatory authorities real- time data on short selling, incl uding intraday positions, 
and is more suitable for micro-supervision of transactions"123. In addition, flagging 
could complement a disclosure regime by providing regulators w ith data on short 
positions which remain below any disclosure threshold, and would help regulators to enforce disclosure rules by providing them  with a full picture of the short 
transactions of investors. By introducing a harmonised flagging regime, this would 
reduce the scope for regulatory arbitrage, although if implemente d in isolation option 
2 would still leave some scope for regulator y arbitrage, as short positions obtained 
through OTC derivatives would not be captu red by a flagging regime. However, as 
CESR has recognised, it is possible to us e flagging in combination with disclosure
124. 
Another advantage of this option is that the EU regulatory framework would further 
converge with those of the United St ates and Hong Kong, which both operate 
flagging regimes. 
The disadvantage of option 2 is that the co sts associated with it are considered by 
market participants and some regulators to be significant. Compliance costs would 
include the costs of setting up the necessa ry IT systems, as well as training and 
compliance procedures. According to estimat es received by the UK FSA, the cost of 
a flagging regime could be in a range of several hundreds of thousands of pounds to around 2 million pounds for a larger broker, to 20,000 pounds in system costs for a small broker.
125 No detailed estimates were r eceived as part of the public 
consultation, although some responses argued that the costs woul d be substantial. 
Several respondents, including one exchange , stated that introducing a flagging 
regime would require significant change s of the complete European trading 
infrastructure. At the same time, Greece and Poland operate a flagging system at present and the French regulat or argued in its response to  the public consultation that 
the benefits in terms of increased transpar ency would outweigh th e costs in terms of 
compliance.  
6.1.3.3 Option 3 – notification of significant net short positions to the regulator 
Under this option, short positions would be notified only to the regulator, not to the 
market. To ensure that only significant short positions were notified, a threshold 
would be introduced – CESR has proposed a threshold of 0.2% of issued share 
                                                
 
123 CESR/10-88 (March 2010), p. 6. 
124 Ibid, p. 6. 
125 FSA, DP09/1 (February 2009), annex 3, p.7. 
EN 57   EN capital for notification to regulators126. The related option of whether information on 
short positions should be notif ied in aggregate form is considered under option 5, 
whereas option 6 considers the alternative,  which is the notification of individual 
significant net short positions. 
Option 3 has several advantages compared to option 1. It is very effective as it meets 
fully the objective of increasing transparency for regulators in short positions, and is an improvement on option 2 as it also includes those short positions obtained through CDS, which is to the adva ntage of governments seeking transparency on sovereign 
CDS. It also achieves the objective of reduc ing the scope for regulatory arbitrage by 
setting a common EU-wide standa rd for notification of short positions to regulators. 
This option would therefore also entail lower compliance costs for financial institutions operating in several markets, when compared to the costs of complying 
with the different thresholds for reporti ng across the EU which currently exist.  
One disadvantage of this option is that the market would not receive the data on short 
positions, only regulators. This would me an that the information asymmetries 
between short sellers and other investors described in problem 2 would persist. 
However, it could be argued that market pa rticipants are only interested in data on 
short positions of a certain magnitude, as  to receive data on every short position, 
however small, would mean processing a lo t of data which could be difficult.  
A second disadvantage of this  option is the cost of co mpliance and administrative 
burden on investors. According to the responses r eceived from market participants to 
a survey by DG Internal Market, the ongoi ng costs of compliance with existing 
national reporting obligations are estim ated to be between 50,000 and 60,000 euro 
per jurisdiction.  
The impact on compliance costs could be mitigated if a threshold were to be 
introduced for the reporting of positions to  the regulator. As indicated above, CESR 
has proposed a threshold of 0.2%. Such a threshold would mean that insignificant 
short positions would not have to be reported, which would exclude from the 
obligation those only engaging s hort selling it to a very limited extent. The burden on 
regulators would also be reduced as they  would receive fewer notification and only 
those which reach a sufficient size to be useful for supervisory purposes. 
A third disadvantage is the potential ne gative impact on market liquidity. While 
some studies have suggested that disclosure obligations have a negative impact on liquidity (see section 6.1.2.4. below), thes e concern primarily public disclosure. 
However, disclosure to the regulator may also inhibit firms from short selling if they wish to avoid regulatory scru tiny of their strategies.  
Option 3 is favoured by the majority of ma rket participants w ho responded to the 
public consultation. Although there were ma ny different views on the levels and 
instruments to be covered under such an op tion, there was a signi ficant feeling that 
this would be preferable than public disc losure. Indeed, respondents also stated the 
benefits this would bring to regulators, such as the detailed information needed to 
exercise regulatory duties and, an increased  data set to aid the understanding of the 
effects of short selling.  
                                                
 
126 CESR/10-88 (March 2010), p. 9. 
EN 58   EN However, some respondents (primarily regul ators and non investment firms), as well 
as the association representi ng the interests of issuers in Europe, argued in favour of 
disclosure of short positions to the market as well as to the regulator. CESR has also 
recommended a two-tier model for disclosure which combines disclosure to the regulator at one threshold with disclosure to  the market at a highe r threshold, as this 
would "help deter and constrai n aggressive short selling which may threaten orderly 
markets or pose the risk of market abuse,  and provide early warn ing signs of a build 
up of large short positions, thereby aler ting regulators to potentially abusive 
behaviour and enabling them to monito r and take action more effectively
127" (see 
section 6.1.2.4 below).  
6.1.3.4 Option 4 – disclosure of significant net short positions to the market 
Under this option, net short positions would be disclosed to the market as well as to 
the regulator. In addition, it would then need to be decided whether this information should be disclosed in an aggregated form (see option 5) or as individual net short 
positions (option 6). 
Option 4 has the same advantages as opti on 3 – it meets in full the objective of 
transparency of short positions to the ma rket, including those obtained through CDS, 
and has the same advantages in terms of reducing the scope for regulatory arbitrage 
and compliance costs.  
The advantage of option 4 over option 3 is that it provides markets as well as 
regulators with transparent access to data  on short positions. According to CESR, 
this provides informational benefits to the market, improving insight into market dynamics and making available important info rmation to assist price discovery, as 
well as providing a more effective potential constraint on aggressive large-scale short selling
128.  
However, this option also has disadvantages. In additi on to the compliance costs 
which are of a similar magnitude to those for notification to the regulator, the main 
disadvantage of option 4 is, according to ma ny responses by market participants to 
the public consultation, an adverse impact on market liquidity. This is attributed by 
market participants to concerns that if their positions are disclosed to the market, other investors may copy their strategies (' herding behaviour') and this could result in 
them making losses ('short squeezes'); in order to avoid this risk of 'herding 
behaviour', certain firms might opt not to short sell so as not to have to disclose their 
investment strategies, thereby damaging liquidity. However, CESR argues that 
national regulators who operate public disclosure regimes and have undertaken 
empirical analyses of the impact of these regimes have not seen these concerns materialise
129. For example, the UK regulator, which instituted a temporary regime 
of public disclosure for UK financial securities, found no evidence of phenomena 
such as herding behaviour or short squ eezes occurring while the regime was in 
operation.130 
                                                 
127 CESR/10-088 (March 2010), p. 5. 
128 Ibid, p. 6. 
129 Ibid, p. 8. 
130 FSA, FS09/3: Short Selling , October 2009, p. 16. 
EN 59   EN One study of the UK disclosure regime sugge sts that public short selling disclosure 
obligations reduced short sellers participa tion in equity market s by 20-25%, and that 
the securities subject to the disclosure re gime experienced a 13% decrease in trading 
volumes, as well as a widening of bid-ask spreads of over 45%131. However, the 
results of this study may have been distorte d by the comparison of data in a declining 
market in 2008 with data in a benign mark et from April 2009 onwards, and the wider 
bid-ask spreads on financial st ocks may reflect their higher risk at that time. The UK 
Financial Services Authority (UK FSA) ta kes the view that "while [a public 
disclosure regime] may have some effect on levels of short selling" they "do not 
expect it would do so  to any degree that will reduce ma rket quality." Indeed, the UK 
FSA's analysis of stock lending data for th e financial securities covered by the public 
disclosure regime levels conc luded that levels of short selling were in line with what 
would be expected give n underlying market trends132. 
Option 4 was strongly opposed by a significan t number of market participants who 
responded to the public consultation, notably  banking and investment firms and their 
representative associations, and also to a lesser extent by a limited number of other 
respondents133. However, this option was favoured  by the association representing 
the interests of European i ssuers in their response to the public consultation, on the 
grounds that investor relations departments need to know who is selling shares short 
in order to advise the company's mana gement on the market's views of their 
shares.134 It is also the agreed position of Memb er State regulators within CESR that 
net short positions above a threshold of 0.5% should be disclosed to the market, as in 
addition to the substantial informational be nefits this option would provide to the 
market, it would help to cons train particularly aggressive large-scale short selling 
which may involve unacceptable risks of abuse or disorderly markets135. 
The concerns raised by some market participants could be mitigated by introducing 
thresholds for reporting to the regulator an d to the market, so that only significant 
short positions of a certain magnitude, exceeding a certain threshold, would be 
disclosed. CESR recognises that the e fficacy and compliance burden of such a 
disclosure regime would depend on the leve ls of such thresholds, and that it would 
not provide a complete picture of the overa ll levels of shorting as investors may limit 
their short transactions in order to remain below the disclosure threshold136. 
Nevertheless, they conclude that the benefits of having harmonised uniform thresholds outweigh the disadvantages
137. As outlined above, CESR has proposed a 
threshold of 0.2% for notification to the regul ator, and of 0.5% fo r disclosure to the 
                                                 
131 Oliver Wyman Inc, The effects of short selling public disclosure regimes on equity markets , 2010, pp. 
4-5. 
132 FSA, FS09/3: Short Selling , October 2009, p. 16. 
133 AIMA, BBA, ISDA, ISLA, AFME, Dutch Ministry of Finance, Danish Central Bank and VW group. 
134 EuropeanIssuers, R esponse to European Commission's Public Consultation on Short Selling , 9 July 
2010, p. 3. 
135 CESR/10-088 (March 2010), p. 8. 
136 CESR/10-088 (March 2010), p. 8. Also, in their joint response to the public consultation, the 
Association of Financial Markets in Europe, (AFME) the International Securities Lending Association 
(ISLA) and the International Swaps and Derivatives A ssociation (ISDA) stated that their prime broker 
member firms had "confirmed that their clients avoid short selling beyond disclosure thresholds to 
avoid signalling their trading strategies to the broader market" (p. 8). 
137 CESR/10-088 (March 2010), p. 9.  
EN 60   EN market138. A disadvantage of having thresholds is that short positions held just below 
those thresholds would not be disclosed, but if this option were to be combined with 
option 2, regulators would still have a ccess to data on these short positions. 
Option 4 could also be combined with option 5 and data could be disclosed to the 
market only on an aggregated basis, an opt ion supported by severa l associations of 
market participants139 (see section 6.1.2.5 below). However, combining these options 
would not provide the degree of transparen cy sought by issuers and would not have 
the same effect of discoura ging aggressive short selling. 
6.1.3.5 Option 5 – aggregated disclo sure of net short positions 
Under this option, short positions would not be disclosed individually, but would be 
compiled by the regulator and disclosed to  the market on an anonymous basis: the 
total size of short positions held in a fina ncial instrument would be made public, but 
not the identity of the individual institu tions which held those short positions.  
This option has the advantage that it would partially meet the objective of increasing 
transparency in short positions, including through CDS, and it would also meet the objective of reducing the scope for regulat ory arbitrage and compliance costs through 
a common EU approach to disclosure. Fo r short sellers themselves, it has the 
advantage that their individual short posit ions would not be disclosed, which might 
make them less likely to reduce their levels of short selling (for the reasons explained 
in the analysis of option 4 above), which would mean their cont ribution to liquidity 
in the instruments concerne d would be less affected.  
On the other hand, CESR considers that th e fact that indivi dual positions would 
remain anonymous would make this opti on less effective as a constraint on 
aggressive short selling
140, and so this option would not  contribute to achieving the 
objective of reducing the risk of negative price spirals. 
This option has other disadvantages: the de gree of transparency would be less than 
that provided by the disclosure of individua l short positions (option 6), so issuers and 
other market participants would not know  which individual institutions held 
significant short positions in specific financial instruments, which could be valuable 
information for them in formulating th eir business or investment strategies. 
Furthermore, regulators would have to proce ss the data received in order to publish it 
in aggregated form, thereby imposing ad ministrative costs on them. Financial 
institutions would also still f ace compliance costs to disclose.  
Further, when compared to option 1, opti on 5 has the disadvantag e that EU Member 
States which currently require disclosure of individual short positions would have to 
                                                 
138 Ibid, p. 9. These thresholds were decided following a public consultation, an informal survey by one 
regulator and discussions with all regulators. CESR considers that the public disclosure threshold 
should be higher than that introduced by many regulators in 2008 as it would apply to all shares, not 
just financial sector shares, and the lower threshold for reporting to the regulator would mean that 
regulators would already have had advance notice of building short positions in the issued share capital 
of a particular issuer and would already have had the opportunity to consider their response. 
139 Alternative Investment Managers Association, European Commission's Public Consultation on Short 
Selling , 13 July 2010, p. 2. Also AFME, ISLA and ISDA, p. 7. 
140 CESR/10-088 (March 2010), p. 6. 
EN 61   EN reduce the level of transparency by switchi ng to aggregated disclosure. While this 
may be welcomed by institutions engaged in short selling themselves, the regulators and other market participants in the con cerned Member States may not welcome this 
reduction in the level of transparency th at they have become accustomed to.  
Most market participants who responded to  the consultation favoured this option. In 
contrast, national regulators have agreed in  CESR on a disclosure model based on the 
disclosure of significant individual  net short positions (see option 6). 
6.1.3.6 Option 6 – disclosure of signifi cant individual net short positions 
Under this option, individual short positions  would be notified on a net basis (i.e. 
short positions would be subtracted from long positions). A threshold would be introduced so that only significant net shor t positions would be disclosed. CESR has 
proposed a threshold of 0.5% of  the issued share capital. 
This option is a significant improvemen t on options 1 and 5. It fully meets the 
objective of transparency by providing regulator s or the public with data not just on 
short positions, but also which institutions hold those short positions. Unlike the baseline scenario or option 5, under this option issuers gain full access to data on 
which institutions may hold short positions in their financial instruments, and other market participants can adjust their invest ment strategies based on a complete picture 
of who holds significant short positions at  any given time. Option 6 also fully meets 
the objective of reduc ing the scope for regulatory arb itrage as short positions through 
the use of derivatives are captured and a common disclosure regime would apply to 
all Member States. This would also m ean lower compliance costs for market 
participants compared to option 1. 
The main disadvantage of this option, as  explained above, is  that financial 
institutions may reduce their le vels of short sel ling in order to avoid disclosure of 
their investment strategies to the market, and this could have a negative impact on 
liquidity. However, this could be mitigated by providing for a threshold for 
disclosure to the market. 
6.1.3.7 Option 7 – exemption from disclosure re quirements for market  making activity and 
primary market operations 
Under this option, market making activities and primary market operations would be 
exempt from the disclosure requirements and the flagging requirement. The content 
and conditions for the exemption are as described in section 6.1.2.5. 
As explained in section 6.1.2.5 above, the ra tionale for this exemption is that 
liquidity provided by market making activity is critical to the efficient functioning of markets, especially for less liquid securitie s. CESR has proposed an exemption for 
market making activities in their model for a pan-European short selling disclosure 
regime because, in order to be able to provide liquidity on demand throughout the 
day, market makers regularly have to take short positions, generally temporary ones, and may be at risk of unjustified commerc ial prejudice if those positions are known 
EN 62   EN to the market. CESR recommends that the exemption should be in relation to both 
notification to the regulator and disclosure to the market141. 
This option is also in line with most re sponses from market participants to the 
consultation (see section 6.1.2.5), who consider that market makers and primary market dealers fulfil an important and legi timate function in provi ding liquidity, and 
this liquidity would be affected nega tively by applying di sclosure and other 
obligations to these activities. Further, pub lication of information about positions at 
the end of the trading day would be of limited informational value to competent 
authorities or even misleading as it would onl y provide a snapshot of an arbitrary and 
fleeting position.  
This option has the advantage that the objective of increasing the transparency of 
short selling would be met, while avoiding the possible negative impact on liquidity 
that full application of the proposed tr ansparency requirements could have on 
activities that are essential to the effici ent functioning of markets. In particular, 
issuers would continue to obtai n the benefits of liquidity provision for their financial 
instruments provided by market makers a nd primary market dealers, and financial 
institutions providing this se rvice would be able to continue to do so. At the same 
time, short selling carried out for specul ative or hedging purposes would be captured 
by reporting or disclosure obligations, but not short positions ca rried out for market 
making or primary market operations. 
Another advantage of this option is that  objective 4 would also be achieved, as a 
harmonised exemption for market making, based on a common definition, would eliminate the scope for regulatory arbitrag e as all Member States would have the 
same definition. This would also entail lower compliance costs than the current 
situation where different Member States ap ply different regimes for market makers. 
This option has the disadvantage that regul ators or the market may lose access to 
some data that they may occasionally consider to be useful. However, this risk is 
mitigated by the fact that competent author ities can require any data they consider 
necessary from any market par ticipant using the exemption.  
The other potential disadvantage of this opt ion is that some financial institutions 
might seek to use this exemption to circ umvent the transparency requirements for 
activities which do not in reality constitute ma rket making. However, this risk is very 
limited and can be mitigated by using the harmonised definition of market making 
activities recommended by CESR  and by providing for the cont rols on the use of this 
exemption outlined above. In particular, those wishing to benefit from the exemption would have to notify the competent author ity in writing not less than 30 days in 
advance of their intention to use the exemption, and th e competent authority would 
have the power to obtain information from any institution benefiting from the 
exemption. 
6.1.3.8 The preferred options 
 Impact on stakeholders Effectiveness Efficiency 
Option 1 (baseline) n.a. n.a. n.a. 
                                                 
141 CESR/10-088, pp. 10-11. 
EN 63   EN Option 2 
(flagging) (+++) regulators obtain very precise 
information on short vs. long 
transactions, which captures intraday positions and aids enforcement 
(+++) governments comforted by 
regulators access to real time data 
(0) issuers – no obvious costs or 
benefits 
(0) individual investors – as above 
(- -) financial institutions bear 
compliance costs  (+++) Objective 2: very 
transparent, captures 
intraday positions 
(++ ) Objective 4: partially 
met, but this option in isolation would not capture 
short positions through OTC 
derivatives 
 (- - ) compliance costs 
for financial 
institutions  
 
Option 3 (notification of short 
positions to 
regulator) (+++) regulators obtain data on short 
positions they currently lack 
(- - -) issuers do no have access to data 
on short positions in their shares 
(- - -) individual investors - information 
asymmetries persist 
(+++) governments gain comfort that 
regulators obtain data on short 
positions through CDS 
(- ) financial institutions face 
compliance costs to notify and may 
reduce levels of short selling (+++) Objective 2:fully met 
for regulators 
(+++) Objective 4: fully 
met;, better than option 2 as 
short positions through derivatives are captured (- ) ongoing 
compliance costs; 
could reduce market liquidity 
Option 4 
(disclosure of short 
positions to the 
market) (+++) regulators obtain data on short 
positions they currently lack 
(+++) issuers obtain access to data on 
short positions in their shares 
(+++) individual investors - 
information asymmetries eliminated 
(+++) governments gain comfort that 
regulators obtain transparency on 
short positions through CDS 
(- - -) financial institutions face 
compliance costs to disclose and likely 
to reduce levels of short selling (+++) Objective 2:fully met 
for market 
(+++) Objective 4: fully met (- -) ongoing 
compliance costs; more 
likely to reduce market 
liquidity than option 3 
Option 5 
(aggregated 
disclosure of net 
short positions) (+) regulators have access to data on 
short positions but have to process it in 
order to publish it in aggregated form 
(+) issuers obtain less specific data on 
who holds short positions in their shares 
(+) individual investors see partial 
reduction in information asymmetries 
(++) governments gain transparency 
on short positions through CDS, but 
some may lose out if they currently 
require individual disclosure 
(- -) financial institutions still face 
compliance costs to disclose, but less 
likely to reduce levels of short selling (+) Objective 2: partially met, 
less detailed transparency 
than option 6 
(+) Objective 4: met, but at 
cost of reduced transparency for some Member States (- )ongoing compliance 
costs, but lower impact 
on liquidity  
Option 6 
(disclosure of 
individual significant 
net short positions) (+++) ensures regulators obtain full 
transparency 
(+++) issuers obtain full transparency 
(+++) individual investors informed of 
short sellers' strategies  
(+++) governments obtain full 
transparency on short positions 
through CDS 
(- - -) financial institutions face 
compliance costs and may reduce 
levels of short selling to avoid 
disclosure of their positions (+++) Objective 2: met in 
full  
(+++) Objective 4: met in 
full (- -) ongoing 
compliance costs, more 
likely to reduce market 
liquidity than option 5 
Option 7 
(exemption for 
market making and 
primary market 
operations) (-) regulators may lose some useful 
data or face risk of abusive use of 
exemption 
(+++) issuers obtain full benefits of 
liquidity provision by market makers (++) Objective 2 partially 
met as all short selling 
captured except when it is 
carried out by legitimate 
market makers (+++) liquidity 
provided by market 
makers and primary 
market dealers not 
affected 
EN 64   EN and can use short selling for 
stabilisation 
(+++) individual investors also benefit 
from ease of buying and selling at 
efficient price 
(+++) governments gain comfort that 
liquidity in sovereign bond markets is 
not impaired 
(+++) financial institutions engaged in 
bona fide market making can continue 
their activities  (+++) Objective 4 fully 
achieved as exemption would 
be harmonised at EU level 
(+++) General objective of 
avoiding unduly negative effects on market efficiency 
achieved 
 
Based on the analysis above, the highest sc oring options are options 2, 3, 4, 6 and 7. 
All these options are compatible. In fact, a combination of these five options would 
address some of their individual shortcom ings. In particular, option 3 only provides 
transparency to regulators, whereas opti on 4 provides transparency also to the 
market. By combining these two options, us ing one threshold for notification to the 
regulator and a second, highe r threshold for notif ication to the market, the objective 
of transparency for both would be achie ved. In addition, the higher threshold for 
notification to the market would mitigate an y impact on liquidity th at disclosure at a 
lower threshold might have, while ensuring that regulators obtain the data they 
require. Combining these two options in this way also has the advantage of being in line with the disclosure model drawn up by CESR. The option of requiring disclosure 
of individual significant net short positions (option 6) should be preferred to 
aggregated disclosure (option 5), as it m eets the objectives more fully by providing 
the market with more detailed transparen cy. Combining option 2 (flagging) with the 
disclosure options would complement thes e very effectively by potentially providing 
regulators with real time data on all short positions, not just those above the 
threshold, thereby helping re gulators with enforcement, and would also capture 
intraday positions which would not be captured by a disclosure regime. Finally, opting for an exemption for market making activities and primary market operations 
(option 7) would ensure th at the important liquidity provision function of these 
activities would be able to continue, which would mitigate any potential impact on liquidity of a disclosu re regime. Inclusion of this opt ion will greatly contribute to 
ensuring the proportionality of the overall approach. 
So the preferred option is a combination of options 2, 3, 4, 6 and 7. With regard to the legal scope  of the transparency regime, this should apply to shares 
and their derivatives, including CDS. Howe ver, with regard to bonds, the public 
consultation showed very limited support for the inclusion of corporate bonds and their derivatives in a disclosure regime, and therefore these should be excluded. With 
regard to sovereign bonds a nd their derivatives, includi ng CDS, there was support for 
their inclusion by public authorities, but se rious concerns were expressed about the 
potential negative impact on liquidity of  public disclosure of sovereign bond and 
sovereign CDS short positions. Therefore the disclosure of sovereign bonds and sovereign CDS should be limited to regulators only. This scope is consistent with the 
evidence of problems and concerns raised by governments, regulators or issuers of 
transparency deficiencies; it is therefore also consistent with the principle of 
proportionality. The public consultation showed very limited support for other 
instruments to be captured in a disclosure regime.  
EN 65   EN An important issue of geogra phical scope also arises in the context of disclosure. 
Transactions in shares or sovereign debt admitted to trading on a trading venue in the EU can also take place outsi de the EU, and if such tran sactions are not captured by 
the disclosure regime, this could be circum vented. Therefore for this regime to be 
effective, it is important that notificati on and disclosure obligations apply no matter 
where a transaction takes place, including wh ere it takes place outside the Union but 
in relation to a company or sovereign debt issuer that has shares or sovereign debt 
admitted to trading on a trading venue in the Union.  
6.2. The preferred policy options and instrument 
6.2.1.  The preferred policy options  
Based on the above analysis of  the impacts, the preferre d policy options to achieve 
the objectives set out in this impact assessment are the following: 
Reduce the risks of negative price spirals arising from short positions (including 
those obtained through CDS)  
• introduce a power for national competent auth orities to temporarily restrict short 
selling in a financial instrument admitted to trading on an organised market whose 
price has fallen by a specified quantitativ e threshold, e.g. 10% ('circuit breaker'). 
• grant national competent authorities the power  to temporarily restrict or ban short 
selling of some or all financial instru ments or CDS transactions in exceptional 
situations, with coordination by ESMA a nd without prejudice to ESMA's powers 
under article 10 of Regulation ??/EC establishing ESMA).  
Increase the transparency of short positions (including those obtained through CDS)  
• introduce a flagging system. 
• notification of short posi tions to the regulator at  a threshold of 0.2%.  
• disclosure of short positions to th e public at a threshold of 0.5%.  
• disclosure of individual signi ficant net short positions.  
• exemption from disclosure requirements for market makers.  
Reduce settlement risk linked with 'naked' short selling  
• introduce a requirement that before enteri ng into a short sale, a person must have 
borrowed the share, entered into an agreement to borrow the share or have other 
arrangements which ensure that he will be  able to borrow the share at the time of 
settlement (locate rule) 
• introduce EU rules on settlement discipline so that persons engaging in short sales 
which result in a failure to deliver face appropriate penalties, with buy-in 
procedures and fines in case of settlement failures 
EN 66   EN • exemption for market makers from th e locate rule, but not from the buy-in 
procedures.  
6.2.2.  Choice of instrument to ensure a coordi nated response by EU Member States to 
short selling and CDS 
6.2.2.1 Non-legislative cooperation between Member States with guidelines by 
CESR/ESMA 
One option to achieve the objectives set out in this report would be through 
cooperation between governments and regu lators in the EU Member States, 
coordinated through CESR and in future through ESMA. This is  to some extent 
already happening, as nationa l regulators have discusse d and agreed in CESR on a 
model for a two-tier short selling disc losure regime, and CESR has advised 
regulators to implement this model pending pos sible action at EU level. CESR is also 
working on a model for disclosure to re gulators for sovereign bonds and sovereign 
CDS. If all Member States were to volunt arily implement these models based on the 
work of CESR, this would go a long wa y towards addressing  the objective of 
ensuring that regulators and markets obtain data on short positions, including those obtained through CDS. 
However, the disadvantage of this approach is that it is voluntary, and Member States 
may opt not to implement the CESR model at  national level. In the absence of EU 
legislative action, there would be no obligat ion on Member States to implement this 
transparency regime, and the Commission wo uld not be able to take infringement 
action against Member States that did not act, or which took a different approach 
than that proposed by CESR/ESMA. 
The divergent responses taken by Member States to short selling in exceptional 
situations also illustrate th e limits of non-legislative cooperation. Member States are 
not required to consult and cooperate with  each other before introducing exceptional 
measures, which leaves wide scope for unila teral actions to be taken without prior 
consultation. In the absence of a European legislative framework, the effectiveness of 
national actions is also open to question, as  there is no obligation on Member States 
to cooperate with each other,  and the absence of such cooperation leaves scope for 
regulatory arbitrage.  
Concerning the policy options to reduce potenti al settlement risks arising from naked 
short selling, cooperation betw een Member States also has limited effectiveness. It 
has not been possible for Member States to agree on a common approach to the regulation of naked short selling, with so me Member States having a permanent ban 
(e.g. Spain) and others introducing tempor ary bans (e.g. Fran ce and Germany). 
Trading venues and Member States also ta ke different approaches to the issue of 
settlement discipline. 
Last but not least, the European Commissi on has opted in its Work Programme for 
2010 to present a legislative in itiative on short selling and Credit Default Swaps. In 
view of the disadvantages outlined above , the option of promoting non-legislative 
cooperation between Member States with  guidelines by CESR/ESMA is therefore 
not the most effective and efficient instrument  to achieve the objectives set out in this 
impact assessment.  
EN 67   EN 6.2.2.2 Propose new stand-alone EU legislation on short selling in a Directive or a 
Regulation 
Having discarded the option of a non-legislativ e instrument, this leaves the options of 
pursuing the objectives  of this impact assessme nt through a harmonising legal 
instrument. A harmonising legal instrument would ensure that all Member States 
applied the same regulatory framework based on the same principles, thereby ending 
the current fragmentation of the regulatory response to short selling and ensuring that 
compliance costs would be lower. However, it is necessary to define whether the appropriate legal instrument shoul d be a Directive or a Regulation. 
Traditionally, the main legislative instru ment chosen for EU financial services 
legislation has been a Directive. This wa s because the legislative proposals mainly 
sought to approximate nationa l rules on the taking up of bu siness and the provision 
of services in a gradual manner. The choice of a Directive enables Member States to 
integrate rules into their different legal systems, while allowing some margin for 
them to extend EU rules to area s uncovered by the EU legislation.  
However, a Directive does not seem to be the right choice of instrument in view of 
the objectives of this initiative for a number of reasons. A Directive would leave some scope for Member States to mainta in divergent rules, whereas a Regulation 
would ensure uniform rules throughout the EU. Nevertheless, a Regulation can leave 
some flexibility for national competent au thorities in applying the rules. While a 
Directive requires national implementing prov isions to be adopte d, leaving scope for 
interpretation of the Directive, a Regulati on is directly applicable without requiring 
national legislation, thereby ensuring greater  legal certainty for those subject to the 
legislation.  
Implementation of a Directive into nati onal law can also be a time consuming 
process. In contrast, a Regul ation is immediately applicable after adoption by the 
legislator and, while it is likely to require binding technical sta ndards to be adopted 
through delegated acts in certain areas to en sure consistent application, these can be 
prepared in parallel to the process for adoption of the legislation. Further, a 
regulation does not require any monitori ng of correct implementation by the 
Commission, and those concerned by the provi sions of a Regulation would be able to 
depend on them immediately. Finally, a Re gulation could be directly invoked by 
concerned parties before national administ rations and courts, wh ereas this applies 
only in very limited circumstances for Directives.  
For all these reasons, the Commission services  consider that a Regulation rather than 
a Directive the most appropriate instrument for this initiative.  
6.2.3.  Impact on retail investors and SMEs 
Given that it is a highly risky investment strategy, short selling is unlikely to be 
widely used by retail investors, so to the extent that this initiative may restrict levels 
of short selling, retail invest ors will not be signi ficantly affected in a negative sense. 
However, retail investors would benefit fr om the enhanced transparency of short 
selling transactions, as they would have a clearer picture as to the reasons why some 
investors are selling certain securities, and could either emulate those strategies or 
decide to hold their securi ties in the knowledge that pr ices might rebound when short 
EN 68   EN sellers closed their positions. Retail investor s would also benefit from the enhanced 
stability of markets which coordinated nati onal responses to short selling could bring 
at times when markets are distressed. Reta il investors also benefit from a highly 
liquid market, so the option to exempt market making activiti es would help to 
preserve liquidity and make it easier for reta il investors to buy a nd sell securities at 
efficient prices. The options which reduce the risk of settlement fa ilure would also be 
to the advantage of retail i nvestors, as they would face a lower risk that securities 
they had bought from a short seller w ould not be delivered in due time.  
Shares in SMEs are unlikely to be subject to short selling as these are generally much 
less liquid markets, so small and medium sized issuers would not be substantially 
impacted by restrictions on short selling. Ho wever, SMEs as investors would obtain 
similar benefits to those outlin ed for retail investors above. 
6.2.4.  Impact on third countries  
This initiative will impact on third countri es in two main ways. As explained in 
section 6.1.2, it is proposed that in order fo r them to be effective, notification and 
disclosure obligations should apply no ma tter where a transaction takes place, 
including where it takes pl ace outside the EU but in relation to a company or 
sovereign debt issuer that has shares or  sovereign debt admitted to trading on a 
trading venue in the EU. If this were not to be the case, it would be possible for 
investors to circumvent the disclosure obliga tions by engaging in transactions in third 
countries, either over the count er or (where securities are listed in thir d countries) on 
trading venues in those countries. The public consul tation showed strong support 
from most respondents and from public au thorities for the ap plication of the 
disclosure regime to extend to both pers ons within and outside the EU who have 
significant net short positions in EU shares or EU sovereign bonds. 
This implies that investors or firms which are outside the EU will have to notify, to 
the regulator of the most liquid market in  the EU for the share or sovereign bond, or 
disclose to the market, short positions which exceed the relevant thresholds. In order to enforce this requirement, EU regulator s should be required by the short selling 
legislation to upgrade existing internationa l agreements (e.g. the IOSCO MoU) or 
reach further cooperation agreements with re gulators in the third countries where EU 
shares or sovereign bonds are mainly trad ed. Such agreements should, inter alia, 
provide for exchanges of information with regulators in third countries so as to 
ensure that that concerned investors in those countries are ma de aware of their 
obligations with regard to the EU legisl ation and comply with them. EU regulators 
could in specific cases exchange information with third country regulators to enforce the obligations in EU short se lling legislation, as well to ta ke reciprocal action in an 
exceptional situation. ESMA could be requi red to facilitate such cooperation by 
preparing a template agreement that could be used by national co mpetent authorities. 
These authorities should also be required  to inform ESMA when they propose to 
enter into an agreement with a third c ountry regulator. This approach would be 
proportionate since by upgrading existing ag reements and using an ESMA template 
Member States would be able to limit the costs of reaching cooperation agreements 
with third countries. 
At the same time, it is foreseen that this initiative would not apply to shares for 
which, while they may be admitted to trad ing on a trading venue in the EU, their 
EN 69   EN principal market is located outside the EU. This reflects that f act that shares in 
companies are increasingly traded on a number of different trading venues around 
the world. For example, many large overseas companies have shares traded not only on their home market but on a trading ve nue in the European Union. It is not 
appropriate or proportionate to apply shor t selling requirements where most trading 
of the share takes place outside the Uni on. This is potentially onerous for market 
participants and creates unnecessary comple xity that may disc ourage issuers from 
having their shares traded on venues in the European Union. 
In order to facilita te implementation of this provisi on by investors, ESMA should be 
notified at least every two years by national regulators of which shares fall into this 
category, and ESMA would then pub lish a list of those shares.  
The fact that the legal fr amework on short selling can  diverge across different 
countries leaves scope for internationa l regulatory arbitrag e, especially for 
instruments which are not traded on a regul ated trading venues. In particular, the 
trading of sovereign bonds and credit defaul t swaps is almost exclusively done over 
the counter, and can therefore move very eas ily from one jurisdic tion to another. 
International regulato ry cooperation through fora such as IOSCO is therefore very 
important in this area, and the European  Union should take a lead in enhancing 
cooperation with its main international partners.  
The proposed initiative on short selling aims  at introducing great er coordination in 
Europe in the regulation of financial mark ets. As such, it could contribute to more 
integrated financial markets in Europe. Similarly to the effect of the single currency, this further integration could have the e ffect of enhancing th e global nature of 
European financial markets, which c ould in turn increase their relative 
competitiveness compared to third countries, notably the United States. 
The preferred options retained in this impact assessment would ensure that the 
European Union's regulatory regime would co nverge with that of the United States, 
which already operates a flagging regime, circuit breaker, a disclosure regime, a 
locate rule and buy-in procedures in  case of settlement failures.  
6.2.5.  Social impact 
To the extent that the options considered in this initiative will help to contain the 
effects of future financial crises on the re al economy, they will also help reduce the 
social costs of those cr ises (e.g. unemployment). 
6.2.6.  Environmental impact 
It does not appear that the options proposed in  this will have any direct or indirect 
impacts on environmental issues.  
6.3. Estimate of impact in terms of compliance costs 
The preferred options include requirements for firms to ensure regulators and 
markets obtain data on short positions (i ncluding CDS) by notification of short 
positions to the regulator and by disclosure of  short positions to the public. As part of 
this option, regulators would be expected to provide qua rterly reports to ESMA on 
the net short positions notified or disclose d within their jurisdiction. This section 
EN 70   EN provides an estimate of the compliance costs (including both one-off and ongoing 
costs) implied by these requirements. Th e full explanation of the methodology, 
assumptions and calculation of the estimate can be found in annex 8.  
This section also provides an  indication of the order of magnitude of the cost of 
disclosure of significant short positions in sovereign bonds which is  also part of the 
preferred options. A more comprehensive asse ssment of the compliance cost of this 
approach has not proved possible due to th e absence of data, since no Member State 
has such a disclosure regime at national le vel and no Member Stat e has been able to 
provide estimates for the cost of such a reporting regime. 
For some options assessed in this report it has not proved possible to carry out a 
detailed estimate of the compliance costs for the EU as a whole. This estimates of compliance costs in this section do not in clude the costs of flagging, because other 
than the estimates provided by the UK FS A (see section 6.1.2.2), no cost estimates 
have been submitted to the Commission services despite repeated requests for data from regulators and market participants . The analysis of the flagging option 
acknowledges that the costs of this option co uld be significant, but also that this 
option would offer benefits in te rms of increased transparency. 
Finally, the Commission servi ces have not received from market participants 
estimates of compliance costs for the locate  rule option. However, as explained in 
section 6.1.3.2, the costs of a locate rule would be limited since most market 
participants indicated to the Commission that  they currently apply a locate rule as a 
matter of good business practice.  
According to our estimation, the main pa rt of the compliance costs related to 
notification and disclosure requirements w ould consist in a one-off investment in 
information technology and information syst ems (IT/IS) development, training and 
compliance procedures. We estimated the number of banks and investment firms 
with sufficiently large operations to be likel y to have to disclose (based on data of 
existing disclosure regimes provided by 6 Me mber States). We then assumed that 
10% of these firms would be large, co mplex cross-border in stitutions reporting 
across most EU jurisdictions, with the re maining 90% of firms mainly reporting in 
one jurisdiction.  
Based on estimates provided by some market participants we estimated the average 
one-off costs in terms of IT/IS development, training and compliance procedures for complying with disclosure obligations for these two types of firms. We therefore 
estimate the EU-wide one-off costs in terms of compliance costs to be approximately 137 million euro. We estimate ongoing costs to maintain or upgrade IT/IS on a yearly basis to be 10% of this cost, or approximately 13.7 million euro. 
In order to estimate the ongoing costs in terms of disclosure to th e regulator when the 
relevant threshold is exceeded and to the public when the higher threshold is exceeded, we examined data provided by 6 Member States on the number of 
disclosures received in their current nationa l disclosure regimes. Since these regimes 
are based on disclosure of significant short positions only in shares of financial institutions, we then extrapol ated from this data to obtain an estimate of the yearly 
average number of disclosures for all shar es. We also grouped Member States into 
three categories acco rding to the likely frequency of disclosures per year: high, 
EN 71   EN medium and low. Since these estimates  do not take into account the multiple 
thresholds foreseen in the preferred disclo sure option, these esti mates were adjusted 
based on estimates for the frequency of disc losures at different thresholds provided 
by the UK.  
We then estimated the year ly number of disclosures for each category based on the 
data available from 6 Member States. We es timated the average time it would take to 
produce one disclosure as 2 hou rs. Given that a large propo rtion of notifications are 
likely to be made by complex cross-bo rder entities, often with a centralised 
compliance function in a high wage cost c ountry, we thought it a ppropriate to apply 
an average hourly wage for managers from a large Member State (in this case the UK). We then estimated the costs per Member State of disclosure based on the estimated average number of disclosures.  
As a result of the preceding analysis, we th erefore estimate that the ongoing costs for 
disclosure of short positions in shares to  be approximately 2.1 million euro per year. 
To this should be added the estimate of  ongoing IT/IS costs of 13.7 million euro per 
year. Therefore the annual EU-wide complia nce cost (not including one-off costs) 
could be estimated to be approximately 15.8 million euro. 
For the administrative cost on regulator s of quarterly repor ting to ESMA of 
significant net short positions in their jurisdiction, we also assumed that compiling each quarterly report would take 2 hours. Based on the average hourly wages of managers in the 27 Member States, this gives an estimated total administrative cost for regulators in the EU 27 of 6.758 euro per year. 
The costing of a disclosure regime on bonds should be largely based on the cost 
evaluation carried out for shares above: th e number of reporting entities and the split 
between small and complex cross borders en tities should be the same, as the same 
firms are active in bonds and in shares. 
Along these lines, the articulation of the co sts of the reporting of bonds positions 
should very similar. If the banks set up IT systems for reporting on shares, these 
systems are likely to allow reporting of positions on bonds to a large extent. They 
may need some adjustments at the margin in order to either increase the capacity of 
systems to also take into considerati on reporting on bonds (or to connect to the bond 
positions management systems that may differ slightly from those for shares). In any case, the one off initial costs should be expected to be marginal compared to the initial costs for equities. Conservatively, we  can estimate these costs at 25% of the 
initial costs for shares, with the same variation between complex and non complex 
organisations as we have estimated for shares. One-off compliance costs for the sovereign bond disclosure requirement coul d therefore be estimated to be of the 
order of 34.2 million euro. 
The ongoing costs for bonds should be calcul ated applying the same ratio of 10% of 
initial costs, leading to an estimated ongoing cost of the order of 3.4 million euro. 
However, it is much more difficult to assess the frequency of disclosures on 
sovereign bonds by financial institutions, part icularly as the disc losure threshold is 
not yet known. Nevertheless, th e frequency of disclosure is likely to be lower for two 
main reasons. The first is that there will be only one disclosure threshold for bonds, 
EN 72   EN while there are two different thresholds fo r shares. The second is that bonds are far 
less frequently traded than shares142, so short positions on bonds are therefore very 
likely to vary far less than those for equi ties. The order of magnitude of the gap 
between the two could be further estimated by examining the difference between the average frequency of bond trading compared  to the average frequency of share 
trading. Conservatively, it a ppears reasonable to take 75 % of the number of 
disclosures for shares, since the liquidity of  sovereign bonds is higher than that of 
corporate bonds, but still less th an that of shares. On this basis, we could estimate the 
ongoing compliance costs for sovereign bond disclosures to be of the order of 1.6 million euro per year. This gives an es timate of the ongoing EU-wide compliance 
cost for disclosure of sovereign bonds of the order of 5 million euro per year. 
7. M
ONITORING AND EVALUATION  
The Commission is the guardian of the Tr eaty and therefore will monitor how 
Member States are applying the changes pr oposed in the legislative initiative on 
short selling. When necessary, the Commission will pursue the procedure set out in Article 226 of the Treaty in case any Member State fails to respect its duties concerning the implementation and a pplication of Community Law.  
The evaluation of the consequences of th e application of the legislative measure 
could take place two years after the entry into  force of the legislative measure, in the 
context of a report to the Council and the Parliament on the appropriateness of the reporting and public disclosure thresholds , which has been recommended by CESR.  
The main indicators and sources of information that could be used in the evaluation 
are as follows: 
• Data on short positions gathered by nationa l regulators and reported to ESMA on 
a quarterly basis; 
• Data on liquidity and spreads in the markets affected by the short selling 
initiative; and 
• A report (which could be undertaken by ESMA) on the experience gained by 
regulators in enforcing the short selling initiative and how cooperation has worked 
in practice. 
                                                
 
142 According to the analysis  of corporate bond market activity in 2008 in a response by the Association for 
Financial Markets in Europe to a consultation by CESR on the Directive on Markets in Financial Instruments dated 4 June 2010: the average percentage turnover of the most liquid corporate bonds 
compared to issuance size was 121%, compared to an averag e of 257% for the total European equity 
market in 2008 (based on data by the Federation of European Stock Exchanges).  
EN 73   EN 8. ANNEX 1 – GLOSSARY OF TERMS  
Short Sales143 
What is a short sale? A short sale is generally the sa le of a security you do not own 
(or that you will borrow for delivery). Short sellers believe the price of the security will fall, or are seeking to hedge against pot ential price volatility in securities that 
they own. If the price of the security drops, short sellers buy the security at the lower 
price and make a profit. If the price of the security rises, short sellers will incur a loss. Short selling is used for many purpos es, including to profit from an expected 
downward price movement, to provide liqui dity in response to  unanticipated buyer 
demand, or to hedge the risk of a long position in  the same secur ity or a related 
security. 
Example of a short sale: For example, an investor beli eves that there will be a 
decline in the stock price of  Company A. Company A is tr ading at €60 a share, so the 
investor borrows shares of  Company A stock at €60 a sh are and immediately sells 
them in a short sale. Later, Company A's st ock price declines to  €40 a share, and the 
investor buys shares back on the open ma rket to replace the borrowed shares. Since 
the price is lower, the investor profits on the difference -- in this case €20 a share 
(minus transaction costs such as commissi ons and fees). However, if the price goes 
up from the original price, the investor loses money. Unlike a traditional long position — when risk is limited to the amount invested — shorting a stock leaves an investor open to the possibility of unlimite d losses, since a stock can theoretically 
keep rising indefinitely. 
How does short selling work? Typically, when a person sells short, their brokerage 
firm will loan them the securities. The securities they borrow come from either the firm's own inventory, the marg in account of other brokerag e firm clients, or another 
lender. The person is then able to sell th ese borrowed securiti es knowing that they 
will have to replace them at an arranged later date. If the securities which are 
borrowed pay a dividend, the person must generally pay the dividend to the owner 
from which the secu rities were borrowed. 
Large institutional investors and hedge  funds will typically have standing 
arrangements in place with specialist brokers and inve stment firms who offer an 
established and arranged facil ity to borrow securities. These are referred to as Prime 
Brokers and for a fee will manage the lendi ng and administration of  the securities as 
well as other services, e.g. cash management . Other market participants such as 
settlement systems also offer facilities th at enable investors to ensure that the 
securities are covered and will be available when settlement is due.  
Uncovered or "Naked" Short Sales: In an uncovered short sale, the seller does not 
borrow or arrange to borrow the securities prio r to executing the trade. If the seller is 
then unable to source the securities before the physical settlement date they will be 
unable to deliver to the buyer (known as a " failure to deliver " or "fail").  
                                                
 
143 Explanations are adapted inter alia  from Key points about Regulation SHO, Division of Market 
Regulation, Securities and Exchange Commission, 11 April 2005.  
http://www.sec.gov/spotlight/keyregshoissues.htm   
EN 74   EN Failures to deliver can result irrespective of if the seller physically has the securities 
or not and there may be some legitimate reasons for a fail. For example, human or 
mechanical errors or processing delays can result from transferring securities in 
physical certificate rather than book-entry form, which may happen even if the seller 
physically holds the security. Further, a fa il may also result from an uncovered short 
sale when a market maker, in response to a customer order, sells a very thinly traded 
and illiquid security. If the market make r subsequently encounters difficulty in 
obtaining the security they may be unable to settle. 
1. Credit Default Swaps  
A Credit Default Swap  (CDS) is a derivative which is sometimes regarded as a 
form of insurance against the risk of cred it default of a corpor ate or government (or 
sovereign) bond. In return for an annual premium, the buyer of a CDS is protected 
against the risk of default of the reference entity (stated in the contract) by the seller. 
If the reference entity defaults, the pr otection seller compensates the buyer for the 
cost of default.  
In addition to short selling on cash markets, a net short position  can also be 
achieved by the use of de rivatives, including Credit Default Swaps (CDS). For 
example, if an investor buys a CDS without  being exposed to the credit risk of the 
underlying bond issuer (a so-called "naked CD S"), he is expecting, and potentially 
gaining from, rising credit risk. This is equivalent to short selling the underlying 
bond.  
2. Other Terms 
A Central Counterparty (CCP) is an entity that acts as an intermediary between 
trading counterparties and absorbs some of the settlement risk. In practice, the seller 
will sell the security to  the central counterparty, which will simultaneously sell it on 
to the buyer (and vice versa). If one of the trading parties defaults, the central 
counterparty absorbs the loss. 
A Derivative  is a security whose price is dependent upon, or derived from one or 
more underlying assets. Examples of deriva tives include Options, Futures, CDS, and 
Contracts for Difference. The underlying as sets can be diverse, however common 
examples include shares, bonds, commodities and interest rates.  
Primary Market Operations  are transactions performed by dealers to provide 
liquidity to issuers of new securities such  as sovereign debt a nd for the purposes of 
stabilisation schemes (i.e. share issues  intended to stabilise a share price). 
Stabilisation schemes are defined under the Market Abuse Directive. 
A Market Maker is a firm that will buy and sell a particular security on a regular 
and continuous basis by posting or executing orders at a publicly quoted price. They 
ensure that an investor can  always trade the particular  security and in doing so 
enhance liquidity in that security. 
Prime Brokers,  or firms offering Prime Brokerage  services, are firms which offer 
specialist bespoke services to, generally, large institutions and hedge funds. Prime 
brokerage covers a range of services , including securities borrowing and 
EN 75   EN administration, and cash management. Many large investment banks provide Prime 
Brokerage services. 
A Multilateral Trading Facility (MTF) is an  electronic system which facilitates the 
exchange of securities between counter parties. The securities may include 
derivatives and instruments which do not have a main market, as well as traditional securities. 
A Trading Venue is an official venue wh ere securities are exchanged; it includes 
MTFs and regulated markets (e .g. typical stock exchanges). 
A Long Position refers to the buying of a s ecurity with an expectation that the 
security will rise in value. 
A Short Position refers to the selling of a security with an expectation that the 
security will fall in value. 
A Net Position is where a short position has been subtracted from a long position. If 
the short position is greater than the long position the result will be a Net Short Position; if the long position is greater than the short position the result will be a Net Long Position.  
EN 76   EN 9. ANNEX 2 – SUMMARY OF PUBLIC CONSULTATION ON SHORT SELLING  
DG MARKT services held a public consulta tion between 14 June and 10 July 2010. 
Responses to the public consultation were  received from finance ministries and 
regulators, investors, intermediaries, exch anges and clearers, i ssuers and individual 
citizens (see list in  section 9.2 below). 
9.1. Summary of the responses 
Some 123 contributions were received, of which 112 were authorised for publication, 
including 2 from issuers, 55 from invest ors (funds, banks, associations, investment 
funds, savings banks etc), 14 from exchanges,  19 from Member St ates and Financial 
Agencies (securities regulato rs, finance ministries and relevant bodies), 5 from non-
financial institutions and 17 from others (e.g. chambers of commerce, citizens, academics).  
Contributions received from stakeholders va ried in detail; most elaborated comments 
were provided by investor groups (funds), exch anges and bodies representing issuers.  
There was a fair degree of consistency in the responses. 
The following general remarks were repeated ly raised with respect to the text: 
– Most responses (especially from market participants but also from some public 
authorities) expressed strongly and consis tently the view that the consultation 
paper refers to risks of short selling when  there is little evidence of risks. Most 
responses asked for further ev idence to be provided of those risks; however, some 
public authorities agreed with the consultation document's description of the potential risks of short selling. Many respons es referred to the benefits of short 
selling to market efficiency and quality and some responses included further data 
supporting the positive benefits.  
– At the same time, there was general support for the Commission's aims of 
introducing a harmonised regime dealing with short selling issues to avoid 
problems of unilateral approaches to these issues that have recently been seen.  
– On scope the majority of responses argu ed that the rules should be limited to 
shares and (to a lesser ex tent) sovereign debt. There was opposition especially 
from bond issuer bodies to an extension to corporate bonds. There were also 
concerns by corporates about the lack of  clarity and unintended consequences of 
extending measures designed for shares to other asset classes. 
– On transparency many responses (primarily  from market participants) argued for 
aggregated disclosure to the market of net short positions in shares (instead of 
individual disclosure). On a disclosure regime for sovereign bonds most 
respondents argued that this should only  be disclosed to the regulator.  
– Regarding naked short selling there was some support for introducing 
requirements related to settlement disc ipline but a majority were against any 
restrictions on naked short selling. Some public authorit ies favoured requirements 
EN 77   EN at the point of trading, either on thei r own or in combination with rules on 
settlement discipline. 
– There were mixed responses about em ergency powers although most responses 
seem to accept the need for such power s in an emergency situation. But many 
argued that there needs to be more stri ngent definition of the powers and when 
they can be used. Also some responses argued that ESMA s hould have a stronger 
coordination role. 
On exemptions for market makers there was widespread support for an exemption, 
although there was some limited opposition.  
1. SCOPE OF THE PROPOSAL AND SUBSTANTIVE REQUIREMENTS  
1.1. Scope 1) Which instruments give rise to risks of short selling and what is the evidence of 
those risks? 
The vast majority stated that  there is little  evidence of risks. No new data to support 
any risks was submitted, although some public authorities agreed with the 
description of the potential risks in the consultation document. Many responses 
referred to evidence of be nefits of short selling. 
2) What should be the scope of the requirements? The vast majority of responses argued th at proposals should only apply to equities 
and associated derivatives. They felt that  this is the only ar ea where there is any 
evidence of risks. 
A few supported limited measures for sovereign bonds/sovereign CDS. 
There was opposition (especially from financial bond issuer bodies) to applying 
requirements to corporate bonds as any measur es could not be justified and would be 
detrimental to corporate bond issuers. 
There were also opposition from corporates  who use derivatives about applying 
requirements that are designed for equities to  other assets classes such as interest 
rates and foreign exchange. These responde nts argued that such an approach was 
conceptually flawed and would create diffi culties for many businesses that use these 
derivatives. They argued it was difficult to understand what the short selling 
requirements meant in the context of such  instruments or how they would apply. 
3) In what circumstances should measur es apply outside the European Union? 
There was broad support for applying some requirements to persons outside the EU, 
but many noted the difficulty of enforcing such a regime. 
1.2. Transparency  1) What should be the scope of transparency requirements? 
EN 78   EN The policy option outlined in the consultation document is largely based on the two 
tier model for EU shares recommended by CESR in its report in March 2010. The 
CESR model provides that at  a lower threshold notifica tion of a short position should 
be made only to the regulator and at a higher threshold short positions should be 
disclosed to the market. Notification to regul ators will enable them to monitor and if 
necessary investigate short selling that may pose systemic risks or be abusive. 
Publication of information to the market will provide useful information to other 
market users. The consultation document  included also a specific regime for 
notification to regulators only of significant net short positions in EU sovereign 
bonds. Disclosure to regulators of signifi cant net short positions  relating to EU 
sovereign bonds could provide important info rmation to assist regulators to monitor 
whether such positions are creating disorderly  markets or systemic risks or are being 
used for abusive purposes. There was suppor t for applying transparency requirements 
in relation to shares. There was some s upport for applying transparency requirements 
to sovereign bonds (but not for public disc losure of short posi tions in sovereign 
bonds). 
2) Transparency for notification of short positions in EU shares There was support for these transparency measures although many responses from 
market participants argued for aggregated anonymous disclosure to the market rather 
than disclosure of individual positions. These respondents argued that disclosure to the market exposed them to various risks.  However, public aut horities did not share 
this assessment of the risks of public di sclosure of short positions in shares. 
3) Notification to regulators of net short positions in EU sovereign debt (including 
through the use of CDS) 
There was limited support for this meas ure although it was noted that public 
disclosure of individual positions would be extremely detrimental to sovereign debt 
markets.  
The majority of responses argued that there should be an ex emption for primary 
market operations and market makers, alt hough a few argued against exemptions as 
this only involves private disclosure to regulators. 
1.3. Uncovered short sales  1) What are the risks of naked short se lling and the evidence of those risks? 
Most responses thought there was limited or no evidence of such risks, but 
commented that the primary risks are set tlement failure and market manipulation. 
Some public authorities argued strongly that  there were risks of price volatility 
associated with naked short selling which co uld in extreme situat ions pose a risk to 
financial stability, and that these should be addressed. 
2) Is there evidence of risks of uncovered short selling for instruments other than 
shares? 
No submission provided evidence of risks, but some public authorities saw the same 
risk for short selling of bonds as for shares. 
EN 79   EN 3) Should there be a ban on entering into naked CDS relating to sovereign issuers? 
There was little response to this question. Most of those that did respond pointed out 
there was no evidence of a problem, although  some public authorities saw risks of 
disorderly markets and market manipulation, especially in distre ssed markets. There 
were comments about the difficulty of defining this concept to take into account the various hedging purposes CDS are used for. 
4) Restrictions on uncovered short selling. Most responses argued against any restricti on on naked short selling due to lack of 
evidence of problems, although the issuers association and some public authorities 
supported requirements for settlement disciplin e and/or requirements at the point of 
trading. Many respondents, especially market pa rticipants, argued that  if a locate rule 
were to be introduced it should include the variety of arrangements that are currently used for covered short selling (i.e. not require an agreement to borrow in every case). 
5) Should there be requireme nts for buy in procedures? 
There was general support for including buy in procedures as  this was considered the 
most appropriate means of d ealing with settlement risk. 
6) Should there be requireme nts for marking of orders? 
Most responses argued that such a regime  would be excessive and costly without 
adding much benefit, especially as a sepa rate and more comprehensive transparency 
regime was being proposed by the Commi ssion. One public authority responded that 
marking of orders was necessary as a comple ment to the transparency regime and to 
ensure the enforcement of the short selling regime. 
1.4. Exemptions  1) Should there be an exem ption for market makers? 
On exemptions for market makers there was widespread support for an exemption, 
although there was some limited oppositi on to any form of exemption. 
2) Should there be an exemp tion for shares where the principal market is outside the 
EU? 
This question was widely misinterpreted, as most respondents assumed this was a 
reference to market makers outside the EU.  
3) Other issues relating to market efficiency? 
There was much comment about  the potential adverse effe ct on market liquidity if 
adequate exemptions for market makers and primary dealers were not provided. 
1.5. Emergency powers for competent authorities  1) Are the emergency powers appropriate? 
EN 80   EN There was general support for the emergenc y powers, but many responses (especially 
from market participants) argued that there needed to be more stringent definition of 
the powers and when they could be used. Some public authorities called for more 
flexibility for national authorities in  the exercise of emergency powers. 
2) Should emergency situati ons be further defined? 
Consistent with the need for more st ringent conditions around the use of banning 
powers there was support (especially from ma rket participants) fo r more prescription 
of the circumstances in which powers can be used. 
3) Should emergency bans be restricted in time? The majority agreed that there should be a time restriction. Some thought it should be 
shorter than the max 3 month period sugge sted (i.e. with a 3 month extension in 
exceptional situations). A limited number thought an indefinite ban should be 
permitted.  
4) Are there further measures that would en sure greater coordination of measures in 
an emergency? 
There was support from respondents (alt hough views were mixed among national 
authorities) for further coordination of  emergency measures and for greater 
clarification of th e role of ESMA.  
5) Should there be a temporary circuit breake r requirement if prices fall by a certain 
amount? 
Most responses did not see the benefit of such a measure, on the grounds that trading 
venues already had circuit break er rules that applied if there was a significant price 
fall. However, some respondents argued that  a circuit breaker should be introduced 
instead of, or in addition to, emergency powers.  
1.6. Enforcement and definitions  1) Are there any special enfo rcement provisions necessary? 
No views were expressed.  
2) Are the proposed definitions adequate? It was suggested that a definition of a "perso n" be introduced as this was relevant to 
funds when calculating a net short position. It was suggested that there be further 
definition of "net short position". Ther e was support for a definition of Market 
Maker. 
9.2. List of contributors to public consultation 
Exchanges and Clearers – Total 14
 
BATS Trading Limited BME Spanish Exchanges 
EN 81   EN Chi-X Europe 
Deutsche Börse AG Euroclear FESE ICE Futures Europe/ICE Clear Europe Irish Stock Exchange KDPW (The Central Polish Securitie s Depository and Clearing House)  
London Metal Exchange London Stock Exchange NASDAQ OMX  NYSE Euronext Stuttgart Stock Exchange Investors and Associated Bodies - Total 55
 
ACI  Af2i  AIMA Allianz SE Association française des ma rchés financiers (AMAFI) 
Asociación Española de Banca Association of British Insurers Association of Private Client Investment  Managers and Stoc kbrokers (APCIMS) 
Assogestioni ASSOSIM Barclays Capital British Bankers Association Bloomberg Tradebook Europe Limited 
Bundesverband Alternative Investments  
EN 82   EN BVI (Bundesverband Investment und Asset Management e.V.) 
BWF (Bundesverband der Wertpapierfirmen an den deutschen Börsen e.V.) Crédit Agricole Cheuvreux. Danish Mortgage Banks' Federation and the Association of Dani sh Mortgage Banks, 
Joint Submission 
Danish Shareholders Association  Deutsche Bank AG EFAMA  Eumedion European Association of Public Banks European Banking Federation  European Savings Banks Group Flow Traders B.V. Fogain French Banking Federation (FBF)  Futures and Options Association German Insurance Association  Getco Europe Hedge Fund Standards Board HSBC IMC Trading B.V IntesaSanpaolo S.p.A.  Investment Advisors Association Investment Management Association Investment Quotient ISDA, ISLA, AFME Joint Submission 
Italian Banking Association 
Legal & General Investment Management 
EN 83   EN Managed Funds Association (MFA)  
MEDEF Nordic Bank, Finance and Insurance Unions (NFU) Optiver REB (Raad van de Effectenbranche) Rivoli Fund Management Societe Generale  Spanish Association of Investme nt and Pension Funds (INVERCO) 
State Street Bank and Trust Company Association Française de la  Gestion financière (AFG) 
The Luxembourg Bankers Association UniCredit Group Verband der Auslandsbanken, Association of Foreign Banks in Germany Zentraler Kreditausschuss Issuers – Total 2
 
EuropeanIssuers ICMA Member States and Financial Agencies – Total 19
 
Autorité des Marches Financiers Banca d'Italia  Banque de France CONSOB Consultative Committee of the Spanish CNMV  Czech National Bank Danish Central Bank  Danish Ministry of Economic and Business Affairs 
Det Kongelige Finansdepartement (Norwegian Finance Ministry) 
EN 84   EN ECB Eurosystem 
Federal Ministry of Finance, Germany Finland Ministry of Finance IMF Latvian Ministry of Finance Ministry for National Economy Hungary  Ministry of Economy and Finan ce, Treasury Department, Italy 
Ministère Français de l’Economie, de  l’Industrie et de l’emploi 
Swedish Financial Auth orities Joint Response 
UK Financial Authorities Joint Response Non Financial Institutions – Total 5
 
Daimler AG Oesterreichs Energie Rolls Royce Volkswagen Group Man SE Other – Total 17
 
Austrian Federal Economic Chamber Bundesarbeitskammer Österreich  BUSINESSEUROPE CFA Society of France CFA Society of the UK Confederation of Swedish Enterprise  Deutsches Aktieninstitut Deutscher Industrie- und Handelskammertag European Trade Union Confederation 
Federation of German Business (BDI)  
EN 85   EN IE Business School 
IG BAU  Interest Capturing Systems, LLC International Centre Fo r Financial Regulation 
John Chapman Stellungnahme des Deutschen Gewerkschaftsbundes(DGB) World Economy, Ecology & Development 
EN 86   EN 10. ANNEX 3: OVERVIEW OF MEASURES IN FORCE IN EU 27 ON SHORT SELLING /CDS 
 Disclosure of short 
positions Ban on naked short 
selling Temporary ban on 
short selling Restrictions on 
CDS Other – flagging, 
uptick rule  
Austria Yes – 0.25% net short 
position Yes, temporary ban 
for protected 
financial institutions No No No 
Belgium Yes – 0.25% net short 
position Yes – for protected 
financial institutions No No No 
Bulgaria Yes, recommendation 
to reg. mkts No No No No 
Cyprus No No No No No 
Czech Republic No No No No No 
Denmark No No Yes for protected 
financial 
institutions No No 
Estonia No No No No No 
Finland No No No No No 
France Yes – 0.25% net short 
position for protected 
financial inst. Yes for protected 
financial institutions No No No 
Germany Yes – for selected 
financials, 0.2% net 
short positions to reg. 
and 0.5% to public  Yes for German fin. 
inst., EU sovereign 
bonds No Yes, ban on naked 
CDS No 
Greece No Yes temporary ban 
for all shares on EL 
stock exchange Yes for all shares 
but rescinded 01 
September 2010 No Yes – flagging 
and uptick rule 
Hungary Yes – 0.01% gross 
short position No No No No 
Ireland Yes – 0.25% net short 
position No Yes for protected 
financial 
institutions No No 
Italy No No Yes but expired 
31.07.09 No No 
Latvia No No No No No 
Lithuania No Yes – shares should 
be owned or 
borrowed before sale No No No 
Luxembourg No Yes in financial 
institutions No No No 
Malta No No No No No 
The Netherlands Yes – 0.25 net short 
position No Yes but expired 
01.06.09 No No 
Poland No No – although 
updated Yes but only on No Yes - flagging 
EN 87   EN requirements 
enhance settlement illiquid securities 
Portugal Yes – 0.2% net short 
position to regulator, 
0.5% to public Yes No No No 
Romania No No No No No 
Slovakia No No No No No 
Slovenia No No No No No 
Spain Yes – 0.2% net short 
position to regulator, 
0.5% to public Yes No No No 
Sweden No No No No No 
UK Yes – 0.25% net short 
position No Yes for protected 
fin. inst. but lifted No No 
Sources: Measures adopted by CESR Mem bers on short selling, CESR 08/742 , 22.09.08, updated: 01. 09.10 and 
Clifford Chance, Short selling rules: the global pictur e, Client Briefing June 2009. 
Note: The above table provides only a high level overview of the most recent available me asures and specific details 
should be taken from each Member State's own regulation. 
EN 88   EN 11. ANNEX 4 – SUMMARY OF DISCUSSIONS BETWEEN DG  MARKT  AND CESR-POL  ON 
SHORT SELLING , PARIS , 14 APRIL 2010   
On 14 April, officials from unit G3 of DG  Internal Market and Services of the 
European Commission met experts on short selling from national regulators at the 
premises of CESR in Paris for an exchange  of views on short selling. The discussion 
was structured according to a discussi on paper circulated in advance by the 
Commission services. This note summarises the key issues discussed and positions 
taken by national regulators on each of the main topics discussed. The positions of individual regulators are a nonymous at their request. 
1. Scope of the legislation
 
The chairman of CESR-Pol summarised the views of regulators as follows: no 
Member State has measures in place for short selling of bonds; transparency and 
reporting measures are needed under MiFID fo r transactions in bonds and derivatives 
(including CDS); emergency powers for re gulators on short se lling should cover 
bonds and derivatives as well as shares ; shares are not the same as bonds or 
derivatives – bond markets are more globa l and CDS markets more concentrated. 
One regulator said there is some short se lling of bonds on their market, but as they 
don't have flagging of transactions they ca nnot quantify it; there is no evidence of 
manipulation or wider risks arising from this which would justify a regulatory 
response, and they would need eviden ce of harm to bond market to justify 
introducing a net short position disclosure regime for bonds. They could envisage 
mandatory reporting for CDS transactions to  trade repositories to enable proper 
monitoring of possible risks. 
Another regulator believes there is evidence of market abuse on bond markets, they 
have had some investigations  on this, but they lack the tools to know where, when 
and how it occurs. Should we wait for a cr isis to occur or anticipate this?  
A regulator said there wa s only anecdotal evidence of  problems on bond markets due 
to the limited tools they have. 
One regulator felt disclosure of short positio ns in bonds would have an adverse effect 
on liquidity if it was disclosed to the markets. 
One regulator argued there wa s a risk of settlement fa ilure for bonds due to short 
selling; another responded th at such risks would only aris e from naked short selling 
of bonds and this was not an argument for a disclosure regime; another regulator said 
that settlement failures were not necessari ly linked to naked s hort selling of bonds. 
No other regulators had evidence of short selling in bond markets. 
2. Naked short selling  
CESR-Pol chairman said that regulators pos itions were as follows: some regulators 
wanted a total ban; some wanted a strong locate rule; and others wanted a softer 
locate rule like the US. 
EN 89   EN He summarised the position as follows: nake d short selling poses a risk of settlement 
failure, this can be dealt with by buy in ru les and by sanctions for late settlement 
imposed by exchanges and clearing houses. If rules on this are not harmonised at EU level there is a risk of regulatory arbitrage. 
One regulator argued that settle ment risk does exist for shor t selling of shares, but in 
the their experience the evidence is that the vast majority of trades settle by the due date, and where they don't, this is less due to short selling but rather due to 
administrative problems. This regulator doe s not see a real thre at; they have no 
empirical study on bonds but suspect the same is true as for shares. This regulator 
does not favour an EU regime for naked s hort selling, if presse d could envisage a 
soft locate rule. Requiring da y traders to arrange to borro w shares would be totally 
disproportionate. 
Another regulator said they have seen settl ement problems due to naked short selling, 
although this is not the primary cause, and could provide evidence to the Commission. A locate rule should be stronger than the US rule which is too loosely 
worded. An EU provision should require act ion to borrow shares before the short 
sale. 
Another regulator favours a locate rule and short sales should be flagged.  
One regulator felt naked short selling might increase herding behaviour and 
destabilise the market, but th ere is not a big impact on se ttlement, so they were not 
sure a locate rule would be efficient – th e power to ban in an emergency would be 
better. 
Another regulator favours an obtain rule or  failing that a strong locate rule; naked 
short selling causes stock inflation which could be contained by a strong locate rule. 
One regulator supported a US style locate rule, felt it was not necessary to forbid 
intra day naked short selling. 
Another regulator favours enhancing settlement discipline and could think about an 
uptick rule. 
Two other regulators favour a US-style locate rule. 
Regulators from ten countries all said they had no experience of naked short selling 
on their markets or saw no evidence of ri sks. One Member State had no strong 
feelings but felt a locate rule  would be better than a ban. 
One regulator said they have seen some pr oblems before share issues, and they have 
a US-style locate rule. 
One regulator has less than 1% of settlement  failure as they have an obligation to 
settle on time (two other regulator s said they have the same).  
One regulator argued occasional problems w ith naked short sell ing do not justify 
action; they have imposed penalties in one case of short selling without the intention 
to settle and have exchange rule for settlement. Most short selling in this regulator's experience is intra-day with participants fl at at the end of the day, so there is no 
EN 90   EN settlement needed and no justification for a locate rule in these cases. If there are 
problems this is a matter for settlement rules;  any locate rule should be a soft one and 
apply only to positions held at the end of the day. 
One regulator has flagging of short sales a nd an uptick rule, and naked short selling 
is banned since May 2009.  
One regulator felt that all were agreed on a locate rule, but argued this should 
comprise an obligation to borrow, with a contract. 
When asked by the Commission services wh ether regulators supported an EU level 
rule obliging settlement by the due date as an alternative to a locate rule – one regulator agreed saying that a study of the economic literature by CEMA argued 
naked short selling was best dealt with by sanctions fo r settlement failure. Another 
disagreed, saying action should be at the trad ing point since naked short selling has a 
leverage effect out of proportion to th e share capital of the company concerned. 
Another favoured stronger settlement discipline but as an addition, not as an alternative, to a locate rule.  
3. Naked CDS
 
One regulator said their corporate bond mark et is small so the CDS market is also 
likely to be small; they have no evidence of risks from naked CDS but there is a lack 
of transparency; they see no technical ground s for action, only if  it is abusive, but 
this is a political issue. 
One regulator said they have a huge CDS mark et with many players,  but lack data to 
say if there is an effect on the market so di fficult to say if there are risks. If there was 
evidence of manipulation of sovereign debt markets, they would favour action, which could be a total ban on CDS, or certa in holding periods, or banning naked CDS 
(although the latter would be very difficult to define). 
One regulator said they have daily reporti ng of CDS transactions and have seen no 
evidence of wrongdoing which cannot be d ealt with by MAD or transparency and 
reporting regimes under MiFID. 
Another regulator felt CDS could be a vehi cle for market abuse and is currently 
investigating a suspected case involving corporate CDS just before a market 
operation. CDS should therefore be included in  the MAD; as ther e is little knowledge 
of CDS they favour a more transparent regi me in the future derivatives legislation 
and they could envisage flagging of net short CDS positions. Banning naked CDS 
would not be useful. 
Another regulator agreed there was no case to ban naked CDS, it would be difficult 
to define and there is no evidence of abuse or wider risks. CDS could be a vehicle for 
market abuse as could any financial instru ment. This regulator opposes flagging as it 
would be very expensive for participants a nd difficult to operate, but they support the 
transparency and clearing initia tives foreseen by the Commission. 
Thirteen regulators said they had no ma rket for CDS or no evidence of risks but 
would support the power to ban CDS temporarily in an emergency. 
EN 91   EN One regulator said there have been alle gations in the media of manipulation of 
certain sovereign bonds using CDS which th ey are investigating. Transparency and 
reporting under MiFID is needed and if t hose requirements are not met there should 
be a ban; the alternative would be to impose margin and capital requirements. 
The Commission services summed up that all Member States supported increased 
transparency for CDS through transparency  and reporting requirements under MiFID 
and more centralised clearing, and some  would favour a flagging requirement. 
4. Emergency powers  
One regulator agreed emergency powers for national regulators to restrict or ban 
short selling were needed. Declaration of an emergency should be left to national 
discretion, not an EU-wide decision, and cr iteria should not be defined rigidly ex 
ante as this could preven t a regulator from acting quickly. There should be an 
obligation to notify other regulators, if neces sary after the event, but consultation or 
coordination mechanisms would not work in  an emergency; also not all Member 
States may need to act. The duration of an emergency should  be restricted  or it would 
risk becoming permanent – one regulator  has a 3 month period which can be 
renewed once. This regulator was sceptical of  the revised uptick rule of the SEC, as 
they felt there was no case for an automatic requirement as market conditions were too different. 
Thirteen regulators agreed with this pos ition, with some nuances. One wanted 
flexible criteria for defining an em ergency and did not want to go beyond 
consultation of ESMA members. Anothe r was concerned that the article 10 
procedure in the ESMA regulation would prev ent action, and that the duration of an 
emergency could not be defined ex ante. Anot her agreed, and said that the US circuit 
breaker approach should be studied. 
One regulator said regulators needed similar powers and a lo ng term legal base to act 
in an emergency, and favoured a role for ESMA. 
One regulator favours national discretion on declaration of em ergency, but with 
consultation or notification of ESMA memb ers as a minimum. This regulator doubts 
the efficiency of a circuit breaker, th is should be analysed as it may not be 
appropriate for our markets. 
Another regulator agreed that it was doubtfu l if a circuit breaker would work and 
pointed out that many trading venues in Me mber States have mechanisms in place 
which have the same purpose as a circuit br eaker of slowing the fall in share prices 
(e.g. volatility auctions when  stock falls more than (5 %)). When there is an 
emergency ESMA must play a role, should have a coordinating role before national 
measures. A distinction should be made between EU and national emergencies. 
One regulator agreed that Europe has other mechanisms than a circuit breaker, a 
quantitative trigger is not a ppropriate. Member States should have broad powers in 
an emergency, there should be no inconsis tency with ESMA regulation article 10, 
but we should allow for a differen tiated approach by Member States. 
Another regulator agreed stock exchanges al ready have quantitativ e triggers to stop 
trading, and a 10% drop happens more fre quently in some markets than others. 
EN 92   EN One regulator argued a circuit breaker would need some coordination to be 
considered, so that trading in ot her markets would be considered. 
Another regulator favoured a coordinating role for ESMA and suggested an MoU. 
5. Powers of regulators  
One regulator called for the power to ba n; to introduce tighter disclosure 
requirements; to gather information from market participants; also full investigative powers and powers to compel people to comply and impose penalties for breaches; powers to cooperate with ot her regulators. Sanctions s hould be sufficient to punish 
and deter, and these should not be limited – in this Me mber State sanctions are 
unlimited. Another regulator disagreed sa ying sanctions should be limited for 
constitutional reasons. 
One regulator called for a flagging regime to  enable surveillance. Another proposed a 
harmonised reporting system including client IDs. 
One regulator called for the power to suspend trading and the license of 
intermediaries to be de fined in the regulation.  
Another agreed saying they suspend license s of intermediaries due to failures to 
deliver. This regulator also argued that saying sanctions should have a deterrent 
effect would not be enough to ensure c onvergence. We should not fix a maximum 
sanction, but a minimum. The publication of measures would also be important for 
enforcement. 
One regulator argued that the EU re gime should harmonise these powers. 
Another called for the power to investigate, and to sanc tion also actions in other 
territories, and said sanctions s hould be large en ough to deter. 
One regulator said there should be a power  to suspend tradi ng in all or some 
instruments. 
Another regulator said powers should be broa dened so they cover CDS, or they could 
not take action in an emergency. This re gulator said it could not ban naked short 
selling for a dual listed sh are if another Member State introduced such a ban. 
One regulator said its emergency measures  banned all short se lling in financial 
instruments anywhere in the world, and this  would need the help of other competent 
authorities to enforce.  
The Commission services asked about conc erns about extra-territoriality – one 
regulator said this was a concern, but the power was needed in a global market. Two 
other regulators agreed. 
6. Coordination with third countries
 
One regulator said this was essential fo r any measures on CDS or these could be 
circumvented. Agreements could be bilate ral or through IOSCO. If EU goes for a 
locate rule we should seek international agreement on this appr oach through IOSCO. 
EN 93   EN One regulator proposed a Memorandum of Understanding (MoU) with third 
countries. Another pointed out that MoUs are helpful but don't supersede national 
law, so all regulators should have the possi bility to cooperate with other countries. 
Two regulators proposed an ESMA-third co untry master MoU, but stressed that 
cooperation has to be between nationa l authorities and third countries. 
EN 94   EN  
12. ANNEX 5 – LIST OF ORGANISATIONS REPRESENTED IN MEETING OF COMMISSION 
SERVICES WITH MARKET PARTICIPANTS AND PUBLIC AUTHORITIES ON CREDIT DEFAULT SWAPS
 
5 March 2010 
Morning Session  
AMF BaFin Banque de France / ECB Bundesbank CESR French Treasury FSA Hellenic FSA NBB/BNB NY FED European Commission, official s from DG MARKT and DG ECFIN 
Afternoon session
 
AIMA Assenagon Fund Management Axa Investment Barclays Capital BlackRock Brevan Howard Deutsche Bank Fitch 
Hypo Real Estate 
EN 95   EN ICMA 
ING Ithuba Capital JP Morgan Katholieke Universiteit Leuven BNB/NBB Banque de France / ECB European Commission, official s from DG MARKT and DG ECFIN 
EN 96   EN 13. ANNEX 6 – REGULATORY REGIME IN THE UNITED STATES ON SHORT SELLING  
A number of regulatory developments whic h are relevant in the context of this 
initiative have occurred in the United States in recent months. Before coming to 
those developments, it is necessary to r ecall the broad regulatory regime which the 
Securities and Exchange Commission (SEC) has applied to short selling over many 
years144. Following the 1929 stock market cras h, the SEC was established by the 
Securities Exchange Act of 1934145 and, under the authority granted by this Act, 
issued in 1937 rule 10a-1, known as the "uptick rule". This limited short sales on 
national exchanges to those executed at an uptick (increase in price) over the last 
price at which the preceding sale was executed.  
This uptick rule was adapted in several wa ys over the years but remained in force 
until 2007. In 2004, the SEC adopted Regulation SHO146 which introduced a number 
of additional requirements for short selli ng. In particular, Regulation SHO introduced 
a 'locate' rule for short sellers, requiring them, before entering into a short sale, to borrow the share, have an agreement in  place to borrow th e share or have a 
reasonable belief that the share can be bo rrowed and delivered by the settlement date. 
Regulation SHO also required br oker-dealers to mark sales in all equity securities 
"long," "short," or "short exempt" and in cluded a "close-out" requirement, obliging 
brokers to purchase securities to close out a short position if this position had 
remained open for at least 13 days beyond the 3 day settlement period. This requirement originally only applied to certain securities that had large and persistent "fails to deliver", i.e. which failed to be settled within the normal settlement period of three days. 
In July 2007, the SEC abolished the uptick rule, after several years of analysis. 
Following a long consultati on period in 2009, on 24 Februa ry 2010 the SEC adopted 
a new short sale rule, rule 201 of Regulati on SHO, known as the "revised uptick" or 
"circuit breaker" rule. This rule restricts short sales of a share whose price has fallen 
by more than 10% compared to its closing price the previous da y. The rule restricts 
the display or executio n of a short sale order in such  shares to a price above the 
national best bid for the rest of the tr ading day and the next trading day. The 
exceptions to the rule are limited, as there are no exemptions for bona fide hedging or market making
147.  
During the financial crisis, the SEC intr oduced a number of temporary emergency 
measures. On 15 July 2008, the SEC introduced a temporary "pre-borrow" requirement on short selling of shares in 19 systemically important financial 
                                                
 
144 This overview of the current regulatory regime app licable to short selling in its historical context is 
taken from the following publication: Short Circuit: New Restrictions on Short Selling in U.S. Equity 
Markets , The D.E. Shaw Group Market Insights, May 2010, Vol. 2 No. 2. 
145 The Securities Exchange Act of 1934, 6 June 19 34, ch. 404, title I, Sec. 1, 48 Stat. 881. 
146 Regulation SHO, Securities and Exchange Commi ssion, 17 CFR PARTS 240, 241 and 242 [Release 
No. 34-50103; File No. S7-23-03] http://www.sec.gov/rules/final/34-50103.htm#P19_2741   
147 The SEC's New Short Sale Rule: Implications and Ambiguities , Davis Polk Client Memorandum, 
08.03.2010, p. 4.  
EN 97   EN institutions148. On 18 September the SEC imposed a temporary ban on short sales of 
799 financial stocks149, which grew to 1000 issuers. In September 2008 the SEC also 
tightened the "close-out" requi rement of Regulation SHO so that it applied to all 
securities not settled the day after the nor mal settlement date, and imposed temporary 
reporting requirements on certain short sa les and positions on institutional money 
managers with assets under mana gement of USD 100 million or more.150  
On 1 August 2009 temporary rule 10a-3T,  which required disclosure to the 
authorities of certain aggregated data on short selling transactions, expired. Since 
then, the SEC has been working with self -regulatory organisati ons to make short 
selling volume and transacti on data available to the pub lic through the latter's web 
sites.  
Regarding CDS, these fall within the scope of the Wall Street Reform Act enacted by 
President Obama on 21 July 2010, and the CFTC and SEC will be expected to produce joint rules to implement this. In particular, the Act requires the CFTC and SEC to adopt rules on real time disclosu re to the public of swap transactions, 
including price and volume ; clearing of all swaps th at the CFTC or the SEC 
determine should be cleared, except for co mmercial end-users; a nd all swaps subject 
to clearing should be traded on a secu rities exchange or similar facility
151. 
The Act also includes certai n provisions on short selling, notably it requires the SEC 
to adopt rules for public disclosure, at leas t monthly, of the amount of short sales by 
institutional investment managers152. It also obliges broker- dealers to notify their 
clients that they can opt not to allow their securities to be lent out for short selling, 
explicitly makes manipulative short selling illegal and allows the SEC to adopt rules 
to enforce this provision. The Act also requires the SEC to carry out a cost-benefit study within a year on real time reporting of short sale positions and another study 
within two years on the state of play following the enactme nt of short selling rules.
153 
                                                 
148 SEC Release 34-58166, Emergency Order Pursuant to  Section 12(k)(2) of The Securities Act of 1934 
Taking Temporary Action to Respond to Market Developments, July 15, 2008. Available at: 
http://www.sec.gov/rules/other/2008/34-58166.pdf. 
149 SEC, Emergency Order Pursuant to Section 12(k)( 2) of the Securities Exchange Act of 1934 Taking 
Temporary Action to Respond to Market Developments. Release 34-58572. September 17, 2008. 
Available at: http://www.sec.gov/ rules/other/2008/34-58572.pdf. 
150 The D.E. Shaw Group Market Insights, May 2010, p. 6. 
151 Davis Polk, Summary of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Enacted 
into Law on July 21 2010, 21 July 2010, pp. 52-63. 
152 Ibid,, p. 70. 
153 Ibid, p.68. 
EN 98   EN  
14. ANNEX 7 – BIBLIOGRAPHY OF RECENT ECONOMIC LITERATURE ON SHORT SELLING , 
COMMITTEE ON ECONOMIC AND MARKET ANALYSIS (CEMA),  CESR 
Date: 10 June 2010 
Ref: CESR/10-334 
CEMA – Short selling WG 
Recent economic literature on short selling and “naked CDS” 
Academic economic literature on short selling 
Working papers on short sel ling/ short selling measures  
Naked short selling 
Boulton, Thomas J., and Marcus V. Brag a-Alves, 2009, Naked short selling and 
market returns, Working paper, Miami University. 
Culp, Christopher, and J.B. Heaton, 2008, The economics of naked short selling, 
Regulation , Spring. 
Fotak, Veljko, Vikas Raman, and Pradeep K.  Yadav, 2009, Naked short selling: The 
emperor’s new clothes?, Working pa per, University of Oklahoma. 
Murphy, Austin, Hong Qian, and Yun Elle n Zhu, 2010, “An Empirical Examination 
of the Relationship between Naked Shorting and Share Prices Around the 
Announcement of a Firm’s Need for External  Capital”, Oakland University - School 
of Business Administration 
Stone, Elizabeth C. “Fails to Deliver: Th e Price Impact of Naked Short Sales”, 
Stanford University. 
Putnins, Talis Janis, 2010, “Naked Short Sa les and Fails to Deliver: An Overview of 
Clearing and Settlement Procedures for St ock Trades in the US”, Stockholm School 
of Economics. 
Moffett, Clay M., Robert Brooks, and Jin Q Jeon , 2010, “The Efficacy of Regulation 
SHO in Resolving Naked Shorts”, University of North Carolina Wilmington, 
Cameron School of Business. 
Short-sale bans 2008  
Autore, Don M., Randall S. Billings ley, and Tunde Kovacs, 2009, Short sale 
constraints, dispersion of opinion, and market  quality: Evidence from the short sale 
ban on U.S. financial stocks, Working paper, Florida State University.  
Boehmer, Ekkehart, Charles M. Jones,  and Xiaoyan Zhang, 2009, Shackling short 
sellers: The 2008 shorting ban, Worki ng paper, Texas A&M University. 
EN 99   EN Boulton, Thomas J., and Marcus V. Braga-Alves, 2009, The skinny on the 2008 
naked short sale restrictions, Wo rking paper, Miami University.  
Gagnon, Louis, and Jonathan Witmer, 2009, Short changed? The market’s reaction to 
the short sale ban of 2008, Worki ng paper, Queen’s University. 
Gruenewald, Seraina, Alexander F. Wagne r, and Rolf H. Weber, 2009, Short selling 
regulation after the financial crisis – Fi rst principles revisited, Working paper, 
University of Zurich. 
Grundy, Bruce D., Bryan Lim, and Patric k Verwijmeren, 2009, Do option markets 
undo restrictions on short sales? Eviden ce from the 2008 short-sale ban, Working 
paper, University of Melbourne. 
Khanna, Naveen, and Richmond D. Mathews,  2009, Bear raids and short sale bans: 
Is government intervention justifiable? , Working paper, Duke University. 
Kolasinksi, Adam, Adam V. Reed, and J acob R. Thornock, 2009, Prohibitions versus 
constraints: The 2008 short sales regulations, Worki ng paper, University of 
Washington. 
Lobanova, O., S.S. Hamid, and A.J. Prakash, 2010, "The Impact of Short-Sale 
Restrictions on Volatility, Liquidity, and Ma rket Efficiency: The Evidence from the 
Short-Sale Ban in the U.S." Department of  Finance, College of Business, Florida 
International University. 
Short selling since 2008  
Avgouleas, Emilios, 2010, “A New Framework for the Global Regulation of Short 
Sales: Why Prohibition is Inefficient and Disclosure Insufficient” University of Manchester - School of Law 
Autore, Don M., Thomas J. Boulton, and Marcus V. Braga-Alves, 2010, “Failures to 
Deliver, Short Sale Constraint s, and Stock Overvaluation”, Florida State University - 
College of Business. 
Battalio, Robert H., and Paul H. Schultz , 2010, “Regulatory Uncertainty and Market 
Liquidity: The 2008 Short Sale Ban's Impact  on Equity Option Markets” University 
of Notre Dame - Department of Finance 
Berber, Allesandro, and Marco Pagano, 2010, S hort-Selling bans around the world: 
evidence from the 2007-09 crisis, CSEF working paper. 
Blocher, Jesse, Joseph Engelberg, and Adam V. Reed, 2009, The long short wars: 
Evidence of incentive driven short selli ng by hedge funds, Working paper, UNC at 
Chapel Hill. 
Boehmer, Ekkehart, and Julie Wu, 2009, Short selling and the informational 
efficiency of prices, Working paper, Texas A&M University. 
Bardong, Florian, Sohnke M. Bartram, and Pradeep K. Yadav, 2008, Are short-
sellers different from ‘regular’ trades?,  Working paper, Lancaster University. 
EN 100   EN Boehmer, Ekkehart, Bilal Erturk, and So rin Sorescu, 2008, Why do short interest 
levels predict stock returns?, work ing paper, Texas A&M University. 
Boehmer, Ekkehart, Charles M. Jones,  and Xiaoyan Zhang, 2008, Unshackling short 
sellers: The repeal of the uptick rule , Working paper, Texas A&M University. 
Bris, Arturo, 2008, Short Selling Activity in Financial Stocks and the SEC July 15th 
Emergency Order, Working paper, IMD, Eu ropean Corporate Governance Institute, 
and Yale International Center for Finance.  
Comerton-Forde, Carole, and T ālis J. Putni ņš, 2009: Are short sellers manipulating 
the market?, University of Sydney 
Edwards, A. and K. Hanley, 2008, Short Sel ling in Initial Public Offerings, Working 
Paper. 
Engelbert, Joseph E., Adam V. Reed, and Matthew C. Ringgenberg, 2010, How are 
shorts informed? Short sellers, news, a nd information processing, Working paper, 
University of North Carolina. 
Fox, Merritt B., Lawrence Glosten, and Pa ul Tetlock, 2009, Short Selling and the 
News: A Preliminary Report on an Empirical Study, Working Paper. 
Hansson, Fredrik and Erik Rüdow Fors, 2009, Get Shorty? Market Impact of the 
2008-09 U.K. Short Selling Ban, University of Gothenburg. 
Harris, Lawrence, Ethan Namvar, and Bl ake Phillips, 2009, Price Inflation and 
Wealth Transfer During the 2008 SEC Short-Sa le Ban, Working paper, University of 
Southern California. 
Henry, T.R., D.J. Kisgen, and J. Wu, 2010, "Do Equity Short Sellers Anticipate 
Bond Rating Downgrades?", University of Georgia.  
Khan, Mozaffar, and Hai Lu, 2009, Do short sellers front-run insider sales?, Working 
paper, MIT. 
Lioui, Abraham, 2009, The undesirable e ffects of banning short sales, EDHEC 
working paper. 
Lioui, Abraham, 2010, "Spillover Effects of  Counter-Cyclical Ma rket Regulation: 
Evidence from the 2008 Ban on Short Sales"  
Purnanandam, Amiyatosh, and Nejat Seyhun, 2009, Do short sellers trade on private 
information or false information?, Work ing paper, University of Michigan. 
SEC Office of Economic Analysis Memora ndum, January 14, 2009, Analysis of the 
July Emergency Order Requiring a Pre-Borrow on Short Sales,  
Saffi, Pedro A., and Kari Sigurdsson, 2008, Price efficiency a nd short selling, 
Working paper, IESE Business School. 
Wang, Jun, Steven X. Wei, and Bohui Zha ng, 2008, Short sale constraints and price 
informativeness, Working paper, Hong Kong Polytechnic University. 
EN 101   EN Westerholm, P. Joakim, and MD Mostaf a Ahmed, 2009, The Impact of Actual 
Market Wide Short Selling Restrictions  and Liquidity Constraints During the 
Financial Crisis of 2008,  University of Sidney 
Published / accepted papers on shor t selling/ short selling measures  
Goldstein I. and Guembel A. (2008). Manipu lation and the allocation role of prices. 
Review of Economic Studies , vol 75, 133-164. 
Henry, Tyler R., and Jennifer L. Koski, 2009, Short selling around seasoned equity 
offerings, Review of Financial Studies , 3rd round. 
Karpoff, Jonathan M., and Xiaoxia Lou, 2010, Short sellers and financial 
misconduct, Journal of Finance , forthcoming.  
Edwards, Amy K., and Kathleen Weiss Ha nley, 2010, Short selling in initial public 
offering, Journal of Financial Economics , forthcoming. 
Chen, Crystal Xiaobei, and S. Ghon Rhee,  2010, The impact of short sales on the 
speed of price adjustment: Evidence  from the Hong Kong stock market, Journal of 
Banking & Finance  34, 471-483.  
Christophe, Stephen E. , Fe rri, Michael G., and Hsieh, Jim, 2010, Informed trading 
before analyst downgrades: evidence from short sellers, Journal of Financial 
Economics  95, 85-106. 
Boehmer, Ekkehart, Brad Jordan, and Zs uzsa Huszar, 2010, The good news in short 
interest, Journal of Financial Economics , in press. 
Regulatory literature on short selling 
FSA, 2009, Short selling, Discussion paper. 
IOSCO, 2009, Regulation of short selling, March. SFC (Securities and Futures Commission), 2009 , How short-selling activity affects 
liquidity of the Hong Kong stock market, April 
Literature on short selling from market participants 
Clifton, Matthew, and Mark Snape, 2008, The e ffect of short-selli ng restrictions on 
liquidity: Evidence from the London Stock Exchange, report commissioned by the 
London Stock Exchange.  
Deutsche Bank, 2010, Short selling - Impor tant business in need of globally 
consistent rules 
Marsh, I., Niemer, N., 2008: The Impact of Short Sales Restrictions, International 
Securities Lending Association, (ISLA) the Alternative Investment Management 
Association (AIMA) and London Invest ment Banking Association (LIBA) 
Oliver Wyman, 2010, Effects of short selling disclosures 
EN 102   EN Literature on “naked CDS” 
Duffie, Darrell, 2010: Is There a Case for Banning Short Speculation in Sovereign 
Bond Markets?, Stanford University 
Portes, Richard, 2010: Ban Naked CDS,  London Business School and CEPR 
EN 103   EN 15. ANNEX 7 – DATA ON SHARES OUTSTANDING ON LOAN AS A PROXY FOR VOLUME OF 
SHORT SELLING TRANSACTIONS IN THE EUROPEAN UNION , PROVIDED BY 
DATAEXPLORERS  
 
 
EN 104   EN 
 
 
EN 105   EN 
 
 
EN 106   EN  
16. ANNEX 8 – ESTIMATE OF COMPLIANCE COSTS  
The Commission services assessed the compliance costs of the preferred options. To assist the 
policy development process, DG MARKT issu ed a survey on the expected impacts of 
different policy options to firms with signifi cant short selling activities and received 50 
responses. We also received 20 Member States/ national competent author ities' responses with 
non-attributable background information on short selling. 
Currently there are eleven Member States with short selling disclosure regimes (see Annex 3).  
The preferred options in clude requirements for firms to en sure regulators and markets obtain 
data on short positions (including CDS): 
• Disclosure of short positions to the regulator; 
• Disclosure of short positions to the public. 
As part of this option, regulator s would be expected to provide quarterly reports to ESMA on 
the net short positions notified or disclosed with in their jurisdiction. This section provides an 
estimate of the compliance costs (including bo th one-off and ongoing costs) implied by these 
requirements. 
1. Compliance costs for firms subject  to the disclosure requirements 
It is assumed that the compliance costs are best described by the following elements: 
• One-off costs for the development fo r training, setting up procedures and 
establishing Information Technology/In formation Systems (IT/IS). These costs 
are assumed to depend on the complexity of  the entity subject to the requirement. 
• Ongoing costs for training, procedures and maintenance of IT/IS systems. These 
costs are assumed to be proportional with the one-off costs, and hence also depend 
on complexity of the entity. 
• Ongoing costs depending of the number of notifications. This primarily concerns 
the time spent once the systems have fla gged the need to perform a notification. 
In order to estimate the one-off costs, firstly the number of reporting firms on short position is 
estimated, and secondly the average cost per fi rm (according to its complexity) is estimated. 
The firms are grouped into two categories: comp lex cross-border firms and other firms. The 
complex cross-border firms are characterised as  global financial market players operating in 
all EU Member States. Other firms are all sma ll and medium sized firm s operational in one or 
few Member States. 
The ongoing cost for maintenance of IT/IS syst ems, the due-diligence process, training and 
setting up procedures is assumed, on an annual ba sis, to be a fraction of the one-off-costs in 
that regard. The remaining ongoing costs ar e assumed to depend on the number of actual 
notifications. The requirement for publication when the 0.5% threshold is crossed is not 
accounted for separately, since this threshold is also requires a notifica tion to the regulator. 
EN 107   EN 1.1 One-off costs IT/IS development, training and compliance procedures 
Based on the responses provided by the survey, an  estimated percentage of investment firms, 
credit institutions authorised to provide invest ment services and their foreign branches subject 
to these disclosure requirements would c onsequently amount to around 12% (see table 
below). This assumption is based on the averag e of percentage of entities notifying short 
positions in the UK and Spain at the moment. 
Table 1 – Ratio of firms subject to the disclosu re requirements and being potentially 
exposed to compliance costs  
Number of Reporting 
EntitiesNumber of investment firm, 
credit institutions authorised to 
provide investment services and 
foreign branchesRatio of 
reporting 
firms
(1) (2) (3)=(1)/(2)
UK 400 3.921 0,10
Spain 56 434 0,13
Average: 0,12MS
 
The total number of investment firms, credit institutions authorised to provide investment 
services and their foreign branches is 11,999. We estimate that there should be approximately 
1,440 firms (11,999 x 0.12) in the EU subject to th e disclosure obligatio ns. We also estimate 
that there may be 10%154 of complex cross-border firms and 90% of other firms. Furthermore, 
we extrapolate from the results of the responses  provided from some ma rket participants and 
from some regulators to make an assumption th at the average costs for IT/IS development, 
training and compliance procedures could be  estimated at approximately 500,000 Euro for 
complex cross-border firms and 50,000 Euro for other firms155.  
                                                 
154 The 10% estimate is reached by considering the total nu mber of firms that are significantly more 
complex in their operations than the rest. This is typically large investment banks and other entities with 
a variety of activities across Member States. 10% am ount to 144 entities across the 27 Member States, 
or approximately 5 per Member State. For some Member States this would be a low figure, but in average this is probably a slightly high estimate. The resulting estimates should therefore probably be 
considered prudent in terms of not underestimating the full compliance costs. 
155 An interview with one of the biggest investment banks indicated that their one-off implementation costs 
would probably be €0.5 million. On the other hand, the complexity of the business, and hence the 
number of positions to take into account for calculating the overall exposure, was considered very high 
compared to most other entities. The cost for le ss complex entities should on average therefore only be 
a fraction of that incurred by a large investment bank . It is likely that the difference in the degree of 
complexity could be said to be a factor of 50 or even 100. However, the cost does probably not decrease 
proportionally with less complex structures due to mi nimum costs incurred with  system changes. As a 
result we have found it reasonable to assume that less complex entities will incur a cost of 10%, 
compared to the most complex compan ies. Due to the importance of this estimate effort has been made 
to understand the operational aspect of the requirement. 
EN 108   EN Table 2 – Estimation of costs of IT/IS development, training and compliance procedures  
Estimated division of 
total number EU 
reporting entities on 
short position (%) Estimated number of 
reporting firms on 
short positionsAverage IT/IS 
development, training 
and compliance 
procedures (one-off) 
cost/entityTotal IT/IS development, 
training and compliance 
procedures (one-off) 
costs due to the short 
position notification
(1) (2)=(1)*1.440 (3) (4)=(2)*(3)
Complex cross-border 10% 144 500.000 71.994.000
Others 90% 1.296 50.000 64.794.600
TOTAL 100% 1.440 550.000 136.788.600Classification of Reporting 
Entity
 
1.2 Estimate of on-going costs based on nati onal reporting requirements for financial 
institutions only 
Based on the responses provided by the surve y, we identify two types of on-going costs: 
1. IT/IS upgrade and maintenance. 2. Reporting of short positions. We estimate the IT/IS upgrade and maintenance cost s to be 10% of the in itial cost of IT/IS 
development (including training and compliance pr ocedures) for all the EU  reporting entities.  
Table 3 – Estimates of IT/IS upgrade and maintenance costs (on a yearly basis)   
Total IT/IS development, 
training and compliance 
procedures (one-off) 
costs due to the short 
position notificationIT/IS upgrade & 
maintenance/year/enti
ty (%)Total EU IT/IS upgrade 
& maintenance 
costs/year
(1) (2) (3)
Complex cross-border 71.994.000 10% 7.199.400
Others 64.794.600 10% 6.479.460
TOTAL 136.788.600 13.678.860Classification of Reporting 
Entity
 
Furthermore, an estimate of disclosure frequenc y is based on the releva nt data provided by six 
national competent authorities. Five out of si x national competent authorities have in recent 
months applied disclosure rules providing fo r a threshold of 0.25% of net short positions. 
Under this requirement, the disclosure of short positions to the relevant national competent 
authority was done after the crossing of the th reshold. As the regulators have provided data 
for variable periods (see Table 4, disclosure period provided by regulator s), we recalculated 
the disclosure numbers on a yearly basis. 
EN 109   EN Table 4 – Estimates of yearly disclosure numbers per Member State (MS) and yearly 
average disclosure number for six MS   
To Regulators To Public Total
(1) (2) (3)=(1)/(2)*12
UK 156 N/R 156 12 months 12 156
Spain 441 N/R 441 from 24/09/08 to 10/06/10 20 265
Germany 102 45 102 from 4 March 2010 to 02/06/2010 3 408
France 108 N/R 108 from 01/09/2008 to 01/06/2010 21 62
Netherlands 73 73 from 01/06/2009 to 01/06/2010 12 73
Portugal 24 11 24 from 01/01/2010 to 01/06/2010 5 58MSDisclosure Period provided by 
RegulatorsNumber 
MonthsRecalculated per 
YearNumber of Disclosures of Short-Selling
 
Furthermore, we apply a grouping methodology to estimate the disclosure numbers of short 
positions for all the EU Member States. The countries are grouped into three categories 
according to the likely frequency of disclosures per year: high, medium and low. Based on available information (see table 4) and also based on our extrapolated  number of reporting 
firms subject to disclosure regulation (see table 5, columns 1 and 2), we extrapolate the 
assumed weight of short positions to be disc losed and allocate the potential number of 
disclosures to each Member State (see table 5, column 5).  
Table 5 – Assumed exposure to short positions and yearly average disclosure number 
(sorted in ascending order)   
N° Member StateNumber of investment 
firms, credit institutions 
authorised to provide 
investment services and 
foreign branchesEstimated number 
of reporting firms 
on short positions 
(EU)Number of 
Disclosures of 
Short-SellingAssumed exposure to 
Short positions (based 
on National Competent 
Authorities responses)Yearly average 
disclosure 
number
(1) (2)=(1)*0,12 (3) (see table 4) (4) (5)
1 Latvia N/A N/A Low 58
2 Bulgaria N/A N/A Low 583 Estonia 26 3 Low 584 Lithuania 26 3 Low 58
5 Slovenia 26 3 Low 58
6S l o v a k i a 4 1 5 L o w 5 87 Hungary N/A N/A Low 588 Czech Republic 57 7 Low 58
9 Portugal 76 9 58 Low 58
10 Poland 80 10 Low 5811 Romania 85 10 Low 5812 Malta 91 11 Low 5813 Cyprus 97 12 Low 58
14 Greece 116 14 Medium 73
15 Belgium 132 16 Medium 7316 Netherlands N/A N/A 73 Medium 7317 Luxembourg 199 24 Medium 73
18 Ireland 235 28 Medium 73
19 Sweden 271 33 Medium 7320 Finland 382 46 Medium 7321 Spain 434 52 265 High 223
22 France 490 59 62 High 223
23 Denmark 671 81 High 22324 Italy 881 106 High 22325 Austria 975 117 High 22326 Germany 2687 322 408 High 223
27 United Kingdom 3921 471 156 High 223
11.999 1.440 TOTAL
 
We estimate that reporting disclosure informa tion will take 2 hours. The estimate is based on 
information collected from some market participants. 
EN 110   EN As regards the costs (hourly wage) we did not obtain relevant figures about the distribution 
from across the Member States. However, taking into consideration that a large proportion of 
notifications are likely to be made by complex cross-border entities, often with a centralised 
compliance function located in a high-cost countr y, it appears appropriate to apply an average 
hourly wage of managers from such a Memb er State. The hourly  wage of managers156 in the 
UK is estimated to € 52.81, and is used in the following calculations. 
Table 6 – Calculation of compliance cost of disclo sure for Short position requirements for 
shares in financial institutions only   
Yearly average 
disclosure 
number on Short 
positionsTotal costs 
(based on 
assumed 
exposure) 
(1) (2)=(1)*52,81*2
1 Austria High 223 23.553
2 Belgium Medium 73 7.7103 Bulgaria Low 58 6.1264 Cyprus Low 58 6.1265 Czech Republic Low 58 6.1266 Denmark High 223 23.5537 Estonia Low 58 6.1268 Finland Medium 73 7.7109 France High 223 23.553
10 Germany High 223 23.55311 Greece Medium 73 7.710
12 Hungary Low 58 6.126
13 Ireland Medium 73 7.71014 Italy High 223 23.55315 Latvia Low 58 6.12616 Lithuania Low 58 6.12617 Luxembourg Medium 73 7.71018 Malta Low 58 6.12619 Netherlands Medium 73 7.71020 Poland Low 58 6.12621 Portugal Low 58 6.12622 Romania Low 58 6.12623 Slovakia Low 58 6.126
24 Slovenia Low 58 6.126
25 Spain High 223 23.55326 Sweden Medium 73 7.71027 United Kingdom High 223 23.553
TOTAL 298.482No Member StateAssumed exposure to 
Short positions (based 
on National Competent 
Authorities responses)
 
                                                 
156 The hourly wages are based on standardised ESTAT data (the four-yearly Labour cost survey and the 
annual updates of labour cost (ALC) statistics), reflecting 2006 figures. They already contain the 
standard 25% overhead costs, as requ ired by the Standard Cost Model . 
EN 111   EN 1.3 On-going costs for disclosure of short positions in all EU shares  
Given that under the proposed optio n all EU shares will be subject  to the disclosure regime of 
short positions so the number of  disclosures will increase. The number of daily disclosures 
will vary according to the disclosure regime using the 0.2%, 0.3%, 0.4% and 0.5% threshold levels. 
Table 7 – Statistical Findings in the UK
157  
Statistical Findings
Threshold 0,20 0,30 0,40 0,50
Average no. Disclosures per threshold 1,18 0,78 0,45 0,39Number of Notifications 472 312 180 156
 
A survey in the UK provides a basis for estima ting the number of disclosures in the case 
where a broader set of shares are part of the regime and where multiple thresholds are used. As previously stated the actua l number of notificati ons in the UK on an annual basis was 156 
with a single threshold fo r 0.25%. The number of notifica tions at 0.2% and 0.3% is 
significantly higher most probabl y due to the broader scope of shares. The average of the 
notifications at these thresholds  is 392 [(472 + 312)/2], indicati ng that the overall number of 
notifications would in crease by a factor of 2.5 [(392/156)] due to the broader scope. This is 
reflected in the calculation (see tables 8 and 9) . In addition the total num ber of notifications is 
likely to increase with the highe r number of thresholds. The UK survey gives an indication of 
the relative frequency with which the various thresholds  are likely to trigger a notification. On 
this basis, the factor with which the number of notifications will increase due to the increase 
to 4 thresholds instead of 1 can be estimated to 2.86 [(472 + 312 + 180 + 156)/392].  
These results have been used for our extrapolatio n to get an estimate of the yearly disclosures 
all 27 EU regulators might receive (see table 8). 
Table 8 – Estimates for reporting on-going cost s per threshold (0.2; 0.3; 0.4; 0.5)   
Threshold 0,20 0,30 0,40 0,50
Reporting Administrative burden 903.100 596.964 344.402 298.482Total threshold: 0,2 903.100 000
Total threshold: 0,2; 0,3 903.100 1.500.064 00
Total threshold: 0,2; 0,3; 0,4 903.100 1.500.064 1.844.466 0
Total threshold: 0,2; 0,3; 0,4; 0,5 903.100 1.500.064 1.844.466 2.142.949Short position reporting on-going cost s: 27 Member States estimate
 
We estimate that the on-going compliance cost for disclosure of short positions will be 
approximately 2.1 million Euros (see calculation details in table 10). 
1.4 On-going costs for disclosure of sh ort positions by regulators to ESMA  
The regulators/national competent authorities w ill be required to disclose quarterly short 
positions to ESMA. We estimate that reporting disclosure information will take 2 hours. In 
                                                 
157 Short selling disclosure thresholds: findings of FSA survey. Communication to CESR, 8/12/2009. 
EN 112   EN order to calculate the administra tive cost, we use the hourly wages158 of manager in EU 
Member States (see table 9). 
Table 9 – Estimates for reporting to ESMA on-going costs  
Member State Hourly wage of 
managersReporting disclosure 
cost/year
(1) (2)=(1)*2*4
Austria 51,53 412
Belgium 50,63 405Bulgaria 3,3 26Cyprus 31,64 253Czech Republic 11,52 92
Denmark 51,99 416
Estonia 8,1 65Finland 44,75 358France 51,14 409Germany 46,4 371Greece 26,98 216Hungary 11,66 93Ireland 49,56 396Italy 61,5 492Latvia 5,86 47Lithuania 7,38 59Luxembourg 56,63 453Malta 16,67 133Netherlands 36,88 295Poland 13,02 104Portugal 31 248Romania 9,73 78
Slovakia 7,83 63
Slovenia 18,34 147Spain 37,11 297Sweden 50,8 406United Kingdom 52,81 422
TOTAL 6.758
 
                                                 
158 The hourly wages are based on standardised ESTAT data (the four-yearly Labour cost survey and the 
annual updates of labour cost (ALC) statistics), reflecting 2006 figures. They already contain the 
standard 25% overhead costs, as requ ired by the Standard Cost Model. 
EN 113   EN  On-going costs for 
disclosure for 
Short position 
requirements for 
shares in financial 
institutions only
Threshold Threshold Threshold Threshold Threshold
0,25 0,2 0,3 0,4 0,5
(1) (2) (3)=(2)*52,81*2 (6) (7)=(6)*52,81*2 (8) (9)=(8)*52,81*2 (10) 11)=(10)*52,81*2
1 Austria High 223 675 71.264 446 47.107 257 27.177 223 23.553
2 Belgium Medium 73 221 23.328 146 15.421 84 8.896 73 7.710
3 Bulgaria Low 58 175 18.535 116 12.252 67 7.068 58 6.126
4 Cyprus Low 58 175 18.535 116 12.252 67 7.068 58 6.126
5 Czech Republic Low 58 175 18.535 116 12.252 67 7.068 58 6.126
6 Denmark High 223 675 71.264 446 47.107 257 27.177 223 23.5537 Estonia Low 58 175 18.535 116 12.252 67 7.068 58 6.126
8 Finland Medium 73 221 23.328 146 15.421 84 8.896 73 7.710
9 France High 223 675 71.264 446 47.107 257 27.177 223 23.553
10 Germany High 223 675 71.264 446 47.107 257 27.177 223 23.553
11 Greece Medium 73 221 23.328 146 15.421 84 8.896 73 7.710
12 Hungary Low 58 175 18.535 116 12.252 67 7.068 58 6.12613 Ireland Medium 73 221 23.328 146 15.421 84 8.896 73 7.710
14 Italy High 223 675 71.264 446 47.107 257 27.177 223 23.553
15 Latvia Low 58 175 18.535 116 12.252 67 7.068 58 6.126
16 Lithuania Low 58 175 18.535 116 12.252 67 7.068 58 6.126
17 Luxembourg Medium 73 221 23.328 146 15.421 84 8.896 73 7.71018 Malta Low 58 175 18.535 116 12.252 67 7.068 58 6.126
19 Netherlands Medium 73 221 23.328 146 15.421 84 8.896 73 7.710
20 Poland Low 58 175 18.535 116 12.252 67 7.068 58 6.12621 Portugal Low 58 175 18.535 116 12.252 67 7.068 58 6.126
22 Romania Low 58 175 18.535 116 12.252 67 7.068 58 6.126
23 Slovakia Low 58 175 18.535 116 12.252 67 7.068 58 6.126
24 Slovenia Low 58 175 18.535 116 12.252 67 7.068 58 6.126
25 Spain High 223 675 71.264 446 47.107 257 27.177 223 23.55326 Sweden Medium 73 221 23.328 146 15.421 84 8.896 73 7.710
27 United Kingdom High 223 675 71.264 446 47.107 257 27.177 223 23.553
TOTAL 903.100 596.964 344.402 298.482No Member StateAssumed 
exposure to Short 
positions (based 
on National 
Competent 
Authorities 
responses)Total costs (based on 
assumed exposure) On-going costs for disclosure of short positions in all EU shares
Total costs (based on 
assumed exposure) Total costs (based on 
assumed exposure) Total costs (based on 
assumed exposure) 
EN 114   EN 17. ANNEX 9 – TABLE PROVIDING AN OVERVIEW OF THE SCOPE OF PREFERRED 
OPTIONS  
The below table shows the instruments which ar e in scope for each of the preferred options 
(indicated with a 'Y'). 
 
Financial Instruments 
 
 
Preferred options 
EU Shares 
Derivatives relating to EU 
Shares 
EU Sovereign Debt 
Derivatives relating to EU 
Sovereign Issuers 
CDS relating to EU 
Sovereign Issuers 
Other Financial 
Instruments 
Transparency       
Notification to competent authorities of significant net 
short positions in shares Y Y - - - - 
Requirement to mark a short order on a trading venue as 
"short" Y - - - - - 
Public disclosure of significant net short positions in shares Y Y - - - - 
Notification to competent authorities of significant net 
short positions in sovereign debt and credit default swaps - - Y Y Y - 
Information provided (quarterly) to ESMA Y  Y Y Y Y - 
       
Uncovered Short Sales       
Restrictions on uncovered short sales Y - Y - - - 
Buy in procedures and fines for late settlement Y - Y - - - 
       
Exemptions       
Exemption when the principle trading venue is outside the 
Union Y Y - - - - 
Exemption for market making and primary market 
operations Y Y Y Y Y Y 
       
Powers in exceptional situations       
Disclosure in an exceptional situation -  - - - - Y 
Restrictions on short selling in an exceptional situation Y  Y Y Y Y - 
EN 115   EN Restrictions on Credit Default Swap transactions in an 
exceptional situation - - - - Y - 
Power to temporarily restrict short selling of financial 
instruments in case of a si gnificant price fall (10%) Y Y  Y Y Y Y