Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on Short Selling and certain aspects of Credit Default Swaps
Date: 2010-09-15
Institutions: European Commission
Subjects: credit policy, financial instrument, financial legislation, financial market, financial policy, sale, swap arrangement

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EUROPEAN COMMISSION 

Brussels, 15.9.2010 
COM(2010) 482 final 

2010/0251 (COD) 

Proposal for a 

REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL 

on Short Selling and certain aspects of Credit Default Swaps  

{SEC(2010) 1055} 
{SEC(2010) 1056} 

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EXPLANATORY MEMORANDUM 

1. 

CONTEXT OF THE PROPOSAL 

Short selling of securities is a practice where a natural or legal person sells a security 
he  does  not  own  with  the  intention  of  buying  back  an  identical  security  at  a  later 
point  in  time.  It  is  an  established  and  common  practice  in  most  financial  markets. 
Typically short selling relates to shares although it can also occur in relation to other 
types of financial instruments. 

Short selling can be divided into two types: covered short selling where the seller has 
borrowed the security, or made arrangements to ensure they can be borrowed before 
the short sale and uncovered or naked short selling where at the time of the short sale 
the seller has not borrowed the securities or ensured they can be borrowed. 

Short selling is undertaken by a range of market participants and is used for different 
purposes such as hedging, speculation, arbitrage and market making. 

At  the  height  of  the  financial  crisis  in  September  2008,  competent  authorities  in 
several EU Member States and the USA adopted emergency measures to restrict or 
ban short selling in some or all securities. They acted due to concerns that at a time 
of considerable financial instability, short selling may aggravate the downward spiral 
in  the  prices  of  shares,  notably  in  financial  institutions,  in  a  way  which  could 
ultimately threaten their viability and create systemic risks. The measures adopted by 
Member  States  were  divergent  as  the  European  Union  lacks  a  specific  legislative 
framework for dealing with short selling issues.  

Earlier this year concerns were expressed by some Member States about the possible 
role played by derivative transactions, notably credit default swaps, in relation to the 
prices  for  Greek  sovereign  bonds.  A  number  of  Member  States  (notably  Germany 
and  Greece)  have  recently  adopted  temporary  or  permanent  restrictions  at  national 
level relating to short selling of shares and/or credit default swaps. 

The European Parliament has also been considering short selling issues in the context 
of consideration of the proposed Directive on alternative investment fund (including 
hedge funds) managers.  

The current fragmented approach to short selling and credit default swaps limits the 
effectiveness  of  supervision  and  the  measures  imposed  and  results  in  regulatory 
arbitrage.  It  may  also  create  confusion  in  markets  and  costs  and  difficulties  for 
market participants. 

Most  studies  conclude  that  short  selling  contributes  to  the  efficiency  of  markets.  It 
increases market liquidity (as the short seller sells securities and then later purchases 
the  identical  securities  to  cover  the  short  sale).  Also,  by  allowing  investors  to  act 
when  they  believe  a  security  is  overvalued  it  leads  to  more  efficient  pricing  of 
securities,  helps  to  mitigate  price  bubbles  and  can  act  as  an  early  indicator  of 
underlying problems relating to an issuer. It is also an important tool that is used for 
hedging and other risk management activities and market making. 

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But  short  selling  can  in  some  situations  be  viewed  as  giving  rise  to  a  number  of 
potential  risks.  For  example  in  extreme  market  conditions  there  is  a  risk  that  short 
selling  can  lead  to  an  excessive  downward  spiral  in  prices  leading  to  a  disorderly 
market  and  possible  systemic  risks.  Moreover,  if  there  is  insufficient  transparency 
about  short  positions  it  can  lead  to  regulators  not  being  able  to  monitor  the 
implications upon market orderliness or monitor the use in connection with abusive 
strategies. In addition, lack of transparency may lead to information asymmetries if 
other market participants are not adequately informed about the extent to which short 
selling is affecting prices. For uncovered short sales there may also be increased risk 
of settlement failures and volatility. 

Short  selling  of  financial  instruments being used as  part of  an abusive strategy, for 
example the use of short sales in connection with the spreading of false rumours to 
drive  down  the  price  of  a  security,  is  already  prohibited  under  the  Market  Abuse 
Directive  2003/6/EC1.  However,  short  selling  is  often  not  abusive  and  there  is 
currently no European legislation dealing with other potential risks that might arise 
from short selling. 

A credit default swap is a derivative which provides a form of insurance against the 
risk  of  credit  default  of  a  corporate  or  government  bond.  In  return  for  an  annual 
premium, the buyer of the credit default swap is protected against the risk of default 
of  the  reference  entity  (stated  in  the  contract)  by  the  seller.  If  the  reference  entity 
defaults, the protection seller compensates the buyer for the cost of the default.  

In  the  Commission's  communication  of  2  June  2010  on  Regulating  Financial 
Services  for  Sustainable  Growth,  the  Commission  stated  that  it  will  propose 
appropriate measures on short selling and credit default swaps2. This would be based 
on the findings of an ongoing investigation into the functioning of financial markets 
and in particular sovereign debt markets. 

A  number  of  jurisdictions  (such  as  the  USA)  have  recently  updated  their  rules 
applying  to  short  selling  of  shares  conducted  on  trading  venues.  The  Commission 
considers  it  is  desirable  to  have  a  regulation  addressing  the  potential  risks  arising 
from  short  selling.  The  intention  is  to  harmonise  requirements  relating  to  short 
selling across the European Union, harmonise the powers that regulators may use in 
exceptional situations where there is a serious threat to financial stability or market 
confidence and ensure greater co-ordination and consistency between Member States 
in such situations. 

The  regulation  should  apply  to  all  natural  or  legal  persons  who  engage  in  short 
selling, across all market sectors, and whether regulated by other pieces of financial 
services regulation (e.g. banks, investment firms, hedge funds etc) or unregulated. As 
far as possible, the requirements should apply to the natural or legal persons entering 
into  short  sales  rather  than  to  other  market  participants  such  as  intermediaries  who 
execute  a  transaction  for  a  client.  The  regulation  aims  at  addressing  the  identified 

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Directive  2003/6/EC  of  the  European  parliament  and  of  the  Council  of  28  January  2003  on  insider 
dealing and market manipulation (OJ L 96, 12.4.2003, p. 16). 
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 - COM(2010) 301, p. 7. 

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risks  without  unduly  detracting  from  the  benefits  that  short  selling  provides  to  the 
quality and efficiency of markets. 

2. 

RESULTS OF CONSULTATIONS WITH THE INTERESTED PARTIES AND 
IMPACT ASSESSMENTS 

The  initiative  is  the  result  of  an  extensive  dialogue  and  consultation  with  all  major 
stakeholders, including securities regulators and market participants. 

The Commission asked the European Securities Markets Expert Group (ESME), an 
independent advisory group to the Commission composed of market participants, to 
prepare  a  report  on  short  selling.  The  report  contains  a  series  of  recommendations 
and was adopted by ESME on 19 March 20093. 

In  April  2009,  the  European  Commission  asked  some  general  questions  about  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  20094.  There  was 
some  support  for  such  a  regime  although  most  contributors  considered  that  the 
Market  Abuse  Directive  was  not  the  appropriate  instrument  for  addressing  short 
selling, as most short selling does not involve market abuse5. 

The  Committee  of  European  Securities  Regulators  (CESR)  consulted  in  the  second 
half  of  2009  on  a  possible  pan-European  model  for  the  reporting  and  disclosure  of 
net short positions in EU shares. On 2 March 2010 CESR published its final report 
recommending  a  model  for  a  pan-European  short  selling  disclosure  regime  for 
shares6.  It  recommended  that  the  Commission  introduce  such  a  regime  as  soon  as 
possible.  On  26  May  2010  CESR  published  a  further  report  setting  out  further 
technical details about how the model should operate7. 

The  Commission  had  a  number  of  discussions  and  consultations  with  various 
stakeholders including regulators8.  

From  14  June  to  10  July  2010,  the  Commission  launched  a  public  consultation  on 
policy options for a possible legislative initiative on short selling and credit default 
swaps.  The  Commission  received  around  120  contributions  which  have  been 
published on the Commission's website9. 

The  proposals  take  into  account  the  work  of  ESME  and  CESR  and  responses  to 
questionnaires  sent  to  market  participants  and  regulators  and  responses  to  the 
relevant public consultations. 

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http://ec.europa.eu/internal_market/securities/docs/esme/report_20090319_en.pdf 
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 
Directive 2003/6/EC defines in its article 1 inside information and market manipulation, which together 
constitute market abuse.  
CESR/10-088 , "Model for a Pan-European Short Selling Disclosure Regime". 
CESR/10-453, "Technical details of the pan-European short selling disclosure regime". 
A  list  of  formal  and  informal  consultations  is  included  in  the  Impact  Assessment  accompanying  this 
proposal. 
http://ec.europa.eu/internal_market/securities/short_selling_en.htm 

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In  line  with  its  "Better  Regulation"  policy,  the  Commission  conducted  an  impact 
assessment  of  policy  alternatives.  Policy  options  related  to  the  scope  of  the 
proposals,  the  proposed  transparency  regimes,  requirements  relating  to  uncovered 
short selling, exemptions and exceptional powers to restrict short selling. 

Each  policy  option  was  assessed  against  the  following  criteria:  impact  on 
stakeholders, effectiveness and efficiency.  

3. 

LEGAL ELEMENTS OF THE PROPOSAL 

3.1. 

Legal basis  

The proposal is based on Article 114 of the TFEU.  

3.2. 

Subsidiarity and proportionality  

The objectives of the proposal cannot be sufficiently fulfilled by the Member States. 

According  to  the  principle  of  subsidiarity  (Article  5.3  of  the  TFEU),  action  on  EU 
level should be taken only when the aims envisaged cannot 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  the  EU.  The  preceding  analysis  has  shown 
that  although  all  the  problems  outlined  above  have  important  implications  for  each 
individual Member State, their 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  concerned.  Moreover,  many  markets  are  by  their 
nature  cross  border  or  international.  Therefore,  there  is  a  real  risk  of  national 
responses to short selling and credit default swaps being circumvented or ineffective 
in the absence of EU level action. 

The divergent responses of Member States to issues relating to short selling pose the 
risk of regulatory arbitrage, as investors could seek to circumvent restrictions in one 
jurisdiction  by  carrying  out  transactions  in  another.  This  regulatory  fragmentation 
could  also  lead  to  increased  compliance  costs  for  market  participants,  especially 
those  operating  on  several  markets,  who  would  have  to  set  up  different  systems  to 
comply with different requirements in different Member States.  

Furthermore,  certain  aspects  of  this  issue  are  already  partly  covered  by  the  acquis, 
notably: the Market Abuse Directive 2003/6/EC which prohibits short selling which 
is  used  to  manipulate  the  market  or  in  conjunction  with  insider  information;  the 
Transparency  Directive  2004/109/EC10,  which  requires  the  disclosure  of  significant 
long  positions;  and  the  Markets  in  Financial  Instruments  Directive  ('MIFID') 
2004/39/EC11  which 
level  requirements  regarding  settlement 

imposes  high 

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Directive  2004/109/EC  of  the  European  Parliament  and  of  the  Council  of  15  December  2004  on  the 
harmonisation of transparency requirements in relation to information about issuers whose securities are 
admitted to trading on a regulated market and amending Directive 2001/34/EC (OJ L 390, 31.12.2004, 
p. 38). 
Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in 
instruments  amending  Council  Directive  85/611/EEC  and  93/6/EEC  and  Directive 
financial 

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arrangements.  This  proposal  on  short  selling  and  these  existing  legal  instruments 
should complement each other. This can best be achieved by common EU rules. 

Against this background EU action appears appropriate in terms of the principles of 
subsidiarity and proportionality. 

It  is  considered  appropriate  and  necessary  for  the  provisions  to  take  the  legislative 
form of a Regulation as some provisions impose direct obligations on private parties 
to notify and disclose net short positions relating to certain instruments. A Regulation 
is also necessary to confer powers on ESMA  to  coordinate  measures  by  competent 
authorities  and  to  take  measures  itself  in  exceptional  situations  where  there  is  a 
serious  threat  to  the  orderly  functioning  and  integrity  of  financial  markets  or  the 
stability of the financial system. Moreover, the use of a Regulation will restrict the 
possibility of divergent measures being taken by competent authorities. 

3.3. 

Detailed explanation of the proposal  

3.3.1. 

Instruments covered by the proposals 

The  proposal  covers  all  financial  instruments  but  provides  for  a  proportionate 
response to the risks that that short selling of different instruments may represent.  

For  instruments  such  as  shares  and  derivatives  relating  to  shares,  sovereign  bonds 
and  derivatives  relating  to  sovereign  bonds  and  credit  default  swaps  relating  to 
sovereign issuers where taking short positions is more common and there are clearly 
identifiable risks or concerns, transparency requirements and requirements relating to 
uncovered short selling are applied.  

In  exceptional  situations  where  there  is  a  serious  threat  to  financial  stability  or 
market  confidence,  the  proposal  provides  for  the  possibility  to  impose  further 
transparency measures on a temporary basis for other financial instruments. 

3.3.2.  Transparency requirements for short positions in certain instruments – Articles 5 to 

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The  proposal  applies  transparency  requirements  to  natural  or  legal  persons  with 
significant  net  short  positions  relating  to  EU  shares  and  EU  sovereign  debt  and  to 
natural or legal persons with significant credit default swap positions relating to EU 
sovereign debt issuers.  

The proposal for share transparency is based on the model recommended by CESR12. 
For companies that have shares admitted to trading on a trading venue in the Union, 
it provides for a two tier model for transparency of significant net short positions in 
shares. At a lower threshold notification of a position must be made privately to the 
regulator  and  at  a  higher  threshold  positions  must  be  disclosed  to  the  market. 
Notification to regulators should enable them to monitor and if necessary investigate 
short selling that may create systemic risks or be abusive. Publication of information 

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2001/12/EC of the European Parliament and of the Council and repealing Council Directive 93/22/EEC 
(OJ L 145, 30.4.2004, p. 1). 
CESR/10-088  and  CESR/10-453.  CESR  only  looked  at  rules  relating  to  shares  whereas  the 
Commission's proposal covers all kinds of financial instruments.  

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to  the  market  should  provide  useful  information  to  other  market  participants  about 
significant individual short selling positions. 

As regards significant net short positions relating to sovereign debt issuers in the EU, 
private disclosure to regulators is required. Disclosure to regulators of such positions 
will  provide  important  information  to  assist  regulators  in  monitoring  whether  such 
positions are creating systemic risks or being used for abusive purposes. The regime 
also  provides  for  notification  of  significant  positions  in  credit  default  swaps  that 
relate to EU sovereign debt issuers. 

In  order  to  enable  the  ongoing  monitoring  of  positions,  the  transparency  regimes 
require notification and/or disclosure where a change in a net short position results in 
an increase or decrease above or below certain thresholds. 

The transparency requirements apply not only to short positions created by trading of 
shares  or  sovereign  debt  on  trading  venues  but  also  to  short  positions  created  by 
trading  outside  trading  venues  (so  called  OTC-trading)  and  economic  net  short 
positions  created  by  the  use  of  derivatives  such  as  options,  futures,  contracts  for 
differences and spread bets relating to shares or sovereign debt. 

The  transparency  requirements  aim  at  ensuring  that  information  provided  to 
regulators  and  the  market  is  complete  and  accurate.  For  example,  information 
provided  should  take  into  account  both  short  and  long  positions  so  that  it  provides 
meaningful information about the natural or legal person's net position.  

As  the  transparency  regimes  will  involve  detailed  and  technical  calculation  of 
individual positions, the proposal provides for further technical details to be adopted 
by the Commission in delegated acts. 

In addition to the transparency regime for the notification and disclosure of net short 
positions  for  shares,  the  proposal  includes  a  requirement  for  the  marking  of  short 
orders. A requirement for the marking or flagging of sell orders executed on trading 
venues as short orders where the seller is entering into a short sale of shares on that 
venue will provide additional information about volumes of short sales executed on 
the  trading  venue.  A  trading  venue  will  be  required  to  publish  daily  information 
about volumes of short sales executed on the venue that is obtained from the marking 
of orders.  

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3.3.3.  Uncovered short sales – Articles 12 and 13 

Uncovered or naked short selling of shares and sovereign debt is sometimes viewed 
as  increasing  the  potential  risk  of  settlement  failure  and  market  volatility.  The 
proposals include detailed requirements aimed at addressing these risks. To this end, 
natural or legal persons entering into short sales of such instruments must at the time 
of the sale have borrowed the instruments, entered into an agreement to borrow the 
shares or made other arrangements which ensure that the security can be borrowed so 
that  settlement  can  be  effected  when  it  is  due.  The  requirement  permits  legitimate 
arrangements  that  are  currently  used  to  enter  into  covered  short  selling  and  which 
ensure that securities will be available for settlement. For example, some participants 
make  arrangements  with  a  prime  broker  before  entering  into  the  sale  to  ensure 
securities are  available for settlement while others have existing arrangements  with 
securities  settlement  systems  that  ensure  the  securities  will  be  available  for 
settlement.  In  this  context,  the  Commission  is  given  the  power  to  adopt  further 
standards  about  the  agreements  to  borrow  and  other  arrangements  under  this 
requirement. 

Furthermore,  trading  venues  must  ensure  that  there  are  adequate  arrangements  in 
place  for  buy-in  of  shares  or  sovereign  debt  where  there  is  a  failure  to  settle  a 
transaction.  In  case  of  non-settlement,  daily  fines  must  be  imposed.  In  addition, 
trading venues will have the power to prohibit a natural or legal person who failed to 
settle to enter into further short sales. 

However, the general issue of harmonisation of settlement periods and arrangements 
is  a  separate  and  broader  issue  that  will  be  more  fully  considered  in  the  context  of 
other  specific  initiatives  (such  as  the  forthcoming  Directive  on  legal  certainty  of 
securities  holding  and 
the  Commission's 
transactions  as  announced 
Communication of 2 June 2010). 

in 

3.3.4.  Exemptions - Articles 14 and 15 

In order to reflect the principle that all measures should be proportionate and address 
the risks of short selling without inadvertently harming legitimate activities that are 
beneficial  to  the  efficiency  and  quality  of  European  markets,  a  certain  number  of 
exemptions are included in the proposals.  

An exemption is provided for shares of a company where the principal market for the 
shares is outside the European Union. This reflects that fact 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  venue  in  the  European  Union.  It  is  not  appropriate  or 
proportionate  to  apply  short  selling  requirements  where  most  trading  of  the  share 
takes place outside the Union. This is potentially onerous for market participants and 
creates unnecessary complexity that may discourage issuers from having their shares 
traded on venues in the European Union. 

An  exemption  is  also  provided  for  market  making  activities.  Market  making 
activities play a crucial role in providing liquidity to European markets and market 
makers  need  to take short positions to perform  this role.  Imposing requirements  on 
such  activities  could  severely  inhibit  the  ability  to  provide  liquidity  and  have  a 

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significant adverse impact on the efficiency of European markets. Moreover, market 
makers generally do not take significant short positions except for during very brief 
periods.  This  exemption  is  intended  to  cover  the  different  types  of  market  making 
activities.  However,  proprietary  trading  is  not  excluded  and  consequently  fully 
covered by the proposal. Competent authorities are required to be notified by persons 
wishing to use this exemption and may prohibit a person from using the exemption if 
the  person  does  not  fulfil  the  relevant  criteria  in  the  exemption.  Competent 
authorities may also demand further information from a person using the exemption. 

An exemption is also provided for primary market operations performed by dealers 
in  order  to  assist  issuers  of  sovereign  debt  or  for  the  purposes  of  stabilisation 
schemes under the Market Abuse Directive. Like market making, these are legitimate 
functions that are important for the proper functioning of primary markets. 

4.3.5. 

Intervention powers – Articles 16 to 25 

The  proposals  recognise  that  in  exceptional  situations  it  may  be  necessary  for 
competent  authorities  to  prohibit  or  restrict  short  selling  activities  that  would 
otherwise be legitimate or pose minimal risks. The proposal provides that in the case 
of adverse developments which constitute a serious threat to financial stability or to 
market confidence in a Member State or the European Union, competent authorities 
should  have  temporary  powers  to  require  further  transparency  or  to  impose 
restrictions on short selling and credit default swap transactions or limit natural and 
legal  persons  from  entering  into  derivative  transactions.  These  powers  extend  to  a 
wide  range  of  instruments.  The  proposals attempt  to  harmonise  the  powers  and  the 
conditions and procedures for use of the powers as much as possible. 

Where  an  adverse  development  or  event  creates  a  threat  to  financial  stability  or 
market confidence that extends beyond one Member State or has other cross border 
implications, it is essential that there is close consultation and co-operation between 
competent  authorities.  The  proposal  introduces  various  procedural  requirements 
aimed  at  ensuring  that  other  competent  authorities  are  notified  if  a  competent 
authority intends to take exceptional measures related to short selling. The European 
Securities  Market  Authority  (ESMA)  is  given  a  key  co-ordination  role  in  such  a 
situation  to  try  to  ensure  consistency  between  competent  authorities.  In  addition  to 
co-ordinating  measures  by  competent  authorities,  ESMA  will  ensure  that  such 
measure  is  only  taken  where  it  is  necessary  and  proportionate  to  do  so.  ESMA  is 
required to issue an opinion on any proposed measure. 

These measures should allow for swift reactions by national regulators in exceptional 
situations  while  ensuring  consistency.  ESMA  would  make  sure  that  situations  with 
cross-border effects would receive – to the extent possible - the same treatment, thus 
reducing the possibility of regulatory arbitrage and instability in the markets. 

The powers of competent authorities to restrict short selling, credit default swaps and 
other transactions contemplate temporary measures (usually for up to a three month 
period) to the extent necessary to deal with the exceptional situation. Such a measure 
can be extended for further periods of three months at a time if the conditions for use 
of  the  power  and  procedural  requirements  are  complied  with.  ESMA  is  required  to 
issue an opinion and ensure that any extension can be justified. 

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In order to ensure a consistent approach to the use of the powers of intervention, the 
Commission is given the power to further define by means of delegated acts criteria 
and factors that must be taken into account by competent authorities and ESMA in 
determining when adverse events or developments create a serious threat to financial 
stability or market confidence. 

In  the  case  of  a  significant  fall  in  the  price  of  a  financial  instrument,  competent 
authorities are given the power to impose a very short prohibition on short selling of 
the  instrument  or  otherwise limit transactions to prevent a disorderly decline in the 
price. Such a 'circuit breaker' power should enable competent authorities to intervene 
if appropriate for a very short period to ensure that short selling does not contribute 
to a disorderly price fall in the instrument concerned. This power would be triggered 
by  objective  criteria  and  would  not  require  an  assessment  of  whether  there  is  a 
serious threat to financial stability or market confidence. 

Finally, although the proposal assumes that competent authorities often will be best 
placed  to  deal  initially  with  exceptional  situations  in  which  there  is  a  threat  to 
financial stability or market confidence and gives ESMA a strong coordination role 
in such cases, it also confers powers on ESMA to take temporary measures in such a 
situation. ESMA  is given the  power to take measures where the situation has cross 
border  implications  and  competent  authorities  have  not  adequately  addressed  the 
threat. ESMA can take the same types of measures as the competent authorities. In 
such  cases,  ESMA  is  required  to  notify  competent  authorities  and  market 
participants.  Any  measure  taken  by  ESMA  in  such  situations  would  override 
measures by competent authorities if there is any inconsistency. 

The  powers  foreseen  specify  the  powers  of  ESMA  in  case  of  short  selling  and  are 
without  prejudice  to  ESMA's  general  powers  as  set  out  in  Regulation  [ESMA 
…/2010]. 

3.3.6.  Powers and sanctions – Articles 26 to 35 

The  proposal  gives  competent  authorities  all  the  powers  necessary  for  the 
enforcement  of  the  rules.  For  example,  the  powers  cover  access  to  documents,  the 
right  to  obtain  information  from  natural  or  legal  persons  and  to  take  enforcement 
action.  

In  individual  cases,  competent  authorities  are  given  the  power  to  request  further 
information from natural or legal persons about the purpose for which a credit default 
swap transaction is entered into and to request information verifying that purpose. 

ESMA is also given the power to conduct inquiries into specific issues or practices 
relating to short selling and to publish a report setting out its findings. 

As certain measures may involve monitoring or enforcement against natural or legal 
persons outside the Union, EU regulators should be encouraged to reach cooperation 
agreements  with  regulators  in  third  countries  where  EU  shares  or  sovereign  bonds 
and  associated  derivatives  are  traded.  This  would  facilitate  the  exchange  of 
information  and  enforcement  of  the  obligations,  as  well  the  taking  of  similar 
measures  by  third  country  regulators  in  exceptional  situations  where  there  is  a 
serious threat to financial stability or market confidence in the Union. ESMA should 

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play  a  role  in  coordinating  the  development  of  cooperation  agreements  and  the 
exchange of information received from third country regulators. 

The  proposal  requires  Member  States  to  provide  for  rules  on  administrative 
measures,  sanctions  and  pecuniary  measures  necessary  for  the  implementation  and 
enforcement of the proposal.  

4. 

BUDGETARY IMPLICATION 

The proposal has no implication for the Union budget. 

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2010/0251 (COD) 

Proposal for a 

REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL 

on Short Selling and certain aspects of Credit Default Swaps  

(Text with EEA relevance) 

THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION, 

Having regard to the Treaty on the Functioning of the European Union, and in particular Article 114 

thereof, 

Having regard to the proposal from the European Commission13, 

After transmission of the draft legislative act to the national Parliaments, 

Having regard to the opinion of the European Economic and Social Committee14, 

Having regard to the opinion of the European Central Bank, 

Acting in accordance with the ordinary legislative procedure, 

Whereas: 

(1) 

(2) 

At the height of the financial crisis in September 2008, competent authorities in several Member 
States  and  the  United  States  of  America  adopted  emergency  measures  to  restrict  or  ban  short 
selling  in  some  or  all  securities.  They  acted  due  to  concerns  that  at  a  time  of  considerable 
financial instability, short selling could aggravate the downward spiral in the prices of shares, 
notably  in  financial  institutions,  in  a  way  which  could  ultimately  threaten  their  viability  and 
create  systemic  risks.  The  measures  adopted  by  Member  States  were  divergent  as  the  Union 
lacks a specific legislative framework for dealing with short selling issues. 

To  ensure  the  functioning  of  the  internal  market  and  to  improve  the  conditions  of  its 
functioning,  in  particular  the  financial  markets,  and  to  ensure  a  high  level  of  consumer  and 
investor protection, it is therefore appropriate to lay down a common framework with regard to 
the  requirements  and  powers  relating  to  short  selling  and  credit  default  swaps  and  to  ensure 
greater coordination and consistency between Member States where measures have to be taken 

13 
14 

OJ C […], […], p. […]. 
OJ C […], […], p. […]. 

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(3) 

(4) 

(5) 

(6) 

(7) 

in  an  exceptional  situation.  It  is  necessary  to  harmonise  the  framework  for  short  selling  and 
certain  aspects  of  credit  default  swaps,  to  prevent  the  creation  of  obstacles  to  the  internal 
market, as it is likely that Member States continue taking divergent measures.  

It is appropriate and necessary for the provisions to take the legislative form of a Regulation as 
some  provisions  impose  direct  obligations  on  private  parties  to  notify  and  disclose  net  short 
positions relating to certain instruments and regarding uncovered short selling. A regulation is 
also  necessary  to  confer  powers  on  the  European  Securities  and  Markets  Authority  (ESMA) 
established by Regulation (EU) No […/…] of the European Parliament and of the Council15 to 
coordinate measures taken by competent authorities or to take measures itself.  

To  set  an  end  to  the  current  fragmented  situation  in  which  some  Member  States  have  taken 
divergent  measures  and  to  restrict  the  possibility  of  divergent  measures  being  taken  by 
competent authorities it is important to address the potential risks arising from short selling and 
credit default swaps in a harmonised manner. The requirements to be imposed should address 
the identified risks without unduly detracting from the benefits that short selling provides to the 
quality and efficiency of markets. 

The  scope  of  the  Regulation  should  be  as  broad  as  possible  to  provide  for  a  preventive 
framework to be used in exceptional circumstances. The framework should cover all financial 
instruments but provide for a proportionate response to the risks that short selling of different 
instruments  may  represent.  Therefore,  it  is  only  in  the  case  of  exceptional  situations  that 
competent  authorities  and  ESMA  should  be  entitled  to  take  measures  concerning  all  types  of 
financial instruments, going beyond the permanent measures that only apply to particular types 
of instruments where there are clearly identified risks that such measures need to address.  

Enhanced  transparency  relating  to  significant  net  short  positions  in  specific  financial 
instruments is likely to be of benefit to both the regulator and to market participants. For shares 
admitted to trading on a trading venue in the Union, a two-tier model should be introduced that 
provides for greater transparency of significant net short positions in shares at the appropriate 
level. At a lower threshold notification of a position should be made privately to the regulators 
concerned  to  enable  them  to  monitor  and,  where  necessary,  investigate  short  selling  that  may 
create systemic risks or be abusive; at a higher threshold, positions should be publicly disclosed 
to  the  market  in  order  to  provide  useful  information  to  other  market  participants  about 
significant individual short selling positions in shares.  

Disclosure  to  regulators  of  significant  net  short  positions  relating  to  sovereign  debt  would 
provide important information to assist regulators in monitoring whether such positions are in 
fact  creating  systemic  risks  or  being  used  for  abusive  purposes.  Notification  to  regulators  of 
significant  net  short  positions  relating  to  sovereign  debt  in  the  Union  should  therefore  be 
provided  for.  Such  a  requirement  should  only  include  private  disclosure  to  regulators  as 
publication of information to the market for such instruments could have a detrimental effect on 
sovereign  debt  markets  where  liquidity  is  already  impaired.  Any  requirement  should  include 
notification of significant exposures to sovereign issuers obtained by using credit default swaps. 

(8) 

The notification requirements for sovereign debt should apply to the debt issued by the Union 
and Member States, including any ministry, department, central bank, agency or instrumentality 

15 

OJ L […], […], p. […]. 

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that  issues  debt  on  behalf  of  a  Member  State  but  excluding  regional  bodies  or  quasi  public 
bodies that issue debt.  

(9) 

In  order  to  ensure  a  comprehensive  and  effective  transparency  requirement,  it  is  important  to 
include not only short positions created by trading shares or sovereign debt on trading venues 
but  also  short  positions  created  by  trading  outside  trading  venues  and  economic  net  short 
positions created by the use of derivatives.  

(10)  To  be  useful  to  regulators  and  the  market,  any  transparency  regime  should  provide  complete 
and accurate information about a natural or legal person's positions. In particular, information 
provided to the regulator or the market should take into account both short and long positions so 
as  to  provide  valuable  information  about  the  natural  or  legal  person's  net  short  position  in 
shares, sovereign debt and credit default swaps.  

(11)  The  calculation  of  short  position  or  long  position  should  take  into  account  any  form  of 
economic interest which a natural or legal person has in relation to the issued share capital of 
company  or  issued  sovereign  debt  of  the  Member  State  or  the  Union.  In  particular,  it  should 
take into account such an interest obtained directly or indirectly through the use of derivatives 
such as options, futures, contracts for differences and spread bets relating to shares or sovereign 
debt. In the case of positions relating to sovereign debt it should also take into account credit 
default swaps relating to sovereign debt issuers.  

(12) 

In  addition  to  the  transparency  regime  for  the  disclosure  of  net  short  positions  in  shares,  a 
requirement for the marking of sell orders that are executed on trading venues as short orders 
should be introduced to provide supplementary information about the volume of short sales of 
shares  executed  on  trading  venues.  Information  about  short  orders  should  be  collated  by  the 
trading  venue  and  published  in  summary  form  at  least  daily  in  order  to  also  help  competent 
authorities and market participants to monitor levels of short selling. 

(13)  Buying credit default swaps without having a long position in underlying sovereign debt can be, 
economically speaking, equivalent to taking a short position on the underlying debt instrument. 
The  calculation  of  a  net  short  position  in  relation  to  sovereign  debt  should  therefore  include 
credit default swaps relating to an obligation of a sovereign debt issuer. The credit default swap 
position should be taken into account both for the purposes of determining whether a natural or 
legal  person  has  a  significant  net  short  position  relating  to  sovereign  debt  that  needs  to  be 
notified  to  a  competent  authority  or  a  significant  uncovered  position  in  a  credit  default  swap 
relating to an issuer of sovereign debt that needs to be notified to the authority.  

(14)  To enable the ongoing monitoring of positions the transparency obligations should also include 
notification  or  disclosure  where  a  change  in  a  net  short  position  results  in  an  increase  or 
decrease above or below certain thresholds. 

(15) 

In  order  to  be  effective,  it  is  important  that  the  transparency  obligations  apply  regardless  of 
where  the  natural  or  legal  person  is  located,  including  where  the  natural  or  legal  person  is 
located outside the Union, but has a significant net short position in a company that has shares 
admitted  to  trading  on  a  trading  venue  in  the  Union  or  a  net  short  position  in  sovereign  debt 
issued by a Member State or the Union.  

(16)  Uncovered  short  selling  of  shares  and  sovereign  debt  is  sometimes  viewed  as  increasing  the 
potential risk of settlement failure and volatility. To reduce such risks it is appropriate to place 

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proportionate restrictions on uncovered short selling. The detailed restrictions should take into 
account the different arrangements currently used for covered short selling. It is also appropriate 
to  include  requirements  on  trading  venues  relating  to  buy-in  procedures  and  fines  for  failed 
settlement  of  transactions  in  those  instruments.  The  buy-in  procedures  and  late  settlement 
requirements should set basic standards relating to settlement discipline.  

(17)  Measures  relating  to  sovereign  debt  and  sovereign  credit  default  swaps  including  increased 
transparency and restrictions on uncovered short selling should impose requirements which are 
proportionate and at the same time avoid an adverse impact on the liquidity of sovereign bond 
markets and sovereign bond repurchase (repo) markets. 

(18)  Shares  are  increasingly  admitted  to  trading  on  different  trading  venues  both  within  the  Union 
and  outside  the  Union.  Many  large  companies  based  outside  the  Union  also  have  shares 
admitted  to  trading  on  a  trading  venue  within  the  Union.  For  reasons  of  efficiency,  it  is 
appropriate  to  exempt  securities  from  certain  notification  and  disclosure  requirements,  where 
the principal venue for trading of that instrument is outside the Union.  

(19)  Market making activities play a crucial role in providing liquidity to markets within the Union 
and market makers need to take short positions to perform that role. Imposing requirements on 
such  activities  could  severely  inhibit  their  ability  to  provide  liquidity  and  have  a  significant 
adverse  impact  on  the  efficiency  of  the  Union  markets.  Further  market  makers  would  not  be 
expected  to  take  significant  short  positions  except  for  very  brief  periods.  It  is  therefore 
appropriate  to  exempt  natural  or  legal  persons  involved  in  such  activities  from  requirements 
which  may  impair  their  ability  to  perform  such  a  function  and  therefore  adversely  affect  the 
Union markets. In order to capture equivalent third country entities a procedure is necessary to 
assess the equivalence of the third country markets. The exemption should apply to the different 
types of market making activity but not to exempt proprietary trading. It is also appropriate to 
exempt  certain  primary  market  operations  such  as  those  relating  to  sovereign  debt  and 
stabilisation  schemes  as  they  are  important  activities  that  assist  the  efficient  functioning  of 
markets. Competent authorities should be notified of the use of exemptions and should have the 
power  to  prohibit  a  natural  or  legal  person  from  using  an  exemption  if  they  do  not  fulfil  the 
relevant  criteria  in  the  exemption.  Competent  authorities  should  also  be  able  to  request 
information from the natural or legal person to monitor their use of the exemption. 

(20) 

In the case of adverse developments which constitute a serious threat to financial stability or to 
market confidence in a Member State or the Union, competent authorities should have powers 
of  intervention  to  require  further  transparency  or  to  impose  temporary  restrictions  on  short 
selling, credit default swap transactions or other transactions to prevent a disorderly decline in 
the  price  of  a  financial  instrument.  Such  measures  could  be  necessary  due  to  a  variety  of 
adverse  events  or  developments  including  not  just  financial  or  economic  events  but  also  for 
example natural disasters or terrorist acts. Furthermore,  some adverse events or  developments 
requiring measures could arise simply in one Member State only and not have any cross border 
implications.  The  powers  need  to  be  flexible  enough  to  deal  with  a  range  of  different 
exceptional situations. 

(21)  While  competent  authorities  will  usually  be  best  placed  to  monitor  market  conditions  and  to 
initially  react  to  an  adverse  event  or  development  by  deciding  if  a  serious  threat  to  financial 
stability  or  to  market  confidence  has  arisen  and  whether  it  is  necessary  to  take  measures  to 
address  this  situation,  the  powers  and  the  conditions  and  procedures  for  their  use  should  be 
harmonised as far as possible. 

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(22) 

In  the  case  of  a  significant  fall  in  the  price  of  a  financial  instrument  on  a  trading  venue  a 
competent  authority  should  also  have  the  ability  to  temporarily  restrict  short  selling  of  the 
financial instrument on that venue in order to be able to intervene rapidly where appropriate and 
for a 24 hour period to prevent a disorderly price fall of the instrument concerned.  

(23)  Where an adverse event or development extends beyond one Member State or has other cross 
border  implications,  close  consultation  and  co-operation  between  competent  authorities  is 
essential. ESMA should perform a key co-ordination role in such a situation and try to ensure 
consistency  between  competent  authorities.  The  composition  of  ESMA  which  includes 
representatives of competent authorities will assist it in its ability to perform such a role. 

(24) 

In  addition  to  co-ordinating  measures  by  competent  authorities,  ESMA  should  ensure  that 
measures are only taken by competent authorities where it is necessary and proportionate to do 
so.  ESMA  should  have  the  power  to  give  opinions  to  competent  authorities  on  the  use  of  the 
powers of intervention.  

(25)  While  competent  authorities  will  often  be  best  placed  to  monitor  and  to  react  quickly  to  an 
adverse event or development, ESMA should also have the power to itself take measures where 
short  selling  and  other  related  activities  threaten  the  orderly  functioning  and  integrity  of 
financial markets or the stability of the whole or part of the financial system in the Union, there 
are  cross  border  implications  and  sufficient  measures  have  not  been  taken  by  competent 
authorities  to  address  the  threat.  ESMA  should  consult  the  European  Systemic  Risk  Board 
whenever possible, and other relevant authorities when the measure could have effects beyond 
the financial markets, as could be the case for commodity derivatives which are used to hedge 
The  powers  of  ESMA  under  this  Regulation  in  exceptional 
physical positions. (26) 
situations to restrict short selling and other related activities are conceived in accordance with 
the powers contained in Article 6a(5) of Regulation …/…. [ESMA]. The powers conferred on 
ESMA  in  exceptional  situations  should  be  without  prejudice  to  the  powers  of  ESMA  in  an 
emergency  situation  under  Article  10  of  Regulation  …/….  [ESMA  Regulation].  In  particular, 
ESMA  should  be  able  to  adopt  individual  decisions  requiring  competent  authorities  to  take 
measures or individual decisions addressed to financial market participants under Article 10. 

(27)  Powers  of  intervention  of  competent  authorities  and  ESMA  to  restrict  short  selling,  credit 
default  swaps  and  other  transactions  should  only  be  temporary  in  nature  and  should  only  be 
exercised for such a period and to the extent necessary to deal with the specific threat. 

(28)  Because  of  the  specific  risks  which  can  arise  from  the  use  of  credit  default  swaps,  such 
transactions  require  close  monitoring  by  competent  authorities.  In  particular,  competent 
authorities  should  have  the  power  in  exceptional  cases  to  require  information  from  natural  or 
legal  persons  entering  into  such  transactions  about  the  purpose  for  which  the  transaction  is 
entered into. 

(29)  ESMA should be given a general power to conduct an inquiry into an issue or practice relating 
to short selling or the use of credit default swaps to assess whether that issue or practice poses 
any potential threat to financial stability or to market confidence. ESMA should publish a report 
setting out its findings when it conducts such an inquiry. 

(30)  As  some  measures  may  apply  to  natural  or  legal  persons  and  actions  outside  the  Union,  it  is 
necessary  in  certain  situations  that  competent  authorities  and  authorities  in  third  countries 
cooperate. Competent authorities should therefore enter into agreements with authorities in third 

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countries. ESMA should co-ordinate the development of such cooperation agreements and the 
exchange between competent authorities of information received from third countries. 

(31)  This  Regulation  respects  the  fundamental  rights  and  observes  the  principles  recognized  in 
particular  in  the  Treaty  on  the  Functioning  of  the  European  Union  and  in  the  Charter  of 
Fundamental Rights of the European Union, notably the right to the protection of personal data 
recognized in Article 16 of the Treaty and in Article 8 of the Charter. In particular, transparency 
regarding significant net short positions, including public disclosure where provided for under 
this  Regulation,  is  necessary  for  reasons  of  financial  market  stability  and  investor  protection. 
Such transparency will enable regulators to monitor the use of short selling in connection with 
abusive strategies and the implications on the well functioning of the markets. In addition, such 
transparency may help avoiding information asymmetries, ensuring that all market participants 
are  adequately  informed  about  the  extent  to  which  short  selling  is  affecting  prices.  Any 
exchange or transmission of information by competent authorities should be in accordance with 
the rules on the transfer of personal data as laid down in Directive 95/46/EC of the European 
Parliament and of the Council of 24 October 1995 on the protection of individuals with regard 
to the processing of personal data and on the free movement of such data16. Any exchange or 
transmission of information by ESMA should be in accordance with the rules on the transfer of 
personal data as laid down in Regulation (EC) No 45/2001 of the European Parliament and of 
the Council of 18 December 2000 on the protection of individuals with regard to the processing 
of personal data by the Community institutions and bodies and on the free movement of such 
data17, which should be fully applicable to the processing of personal data for the purposes of 
this Regulation. 

(32)  Member States should lay down rules on sanctions applicable to infringements of the provisions 
of  this  Regulation  and  ensure  that  they  are  implemented.  The  sanctions  should  be  effective, 
proportionate and dissuasive.  

(33)  The  measures  necessary  for  the  implementation  of  this  Regulation  should  be  adopted  in 
accordance  with  Council  Decision  1999/468/EC  of  28  June  1999  laying  down  the  procedures 
for the exercise of implementing powers conferred on the Commission18. 

(34)  The Commission should be empowered to adopt delegated acts in accordance with Article 290 
of the Treaty. In particular, the delegated acts should be adopted in respect of details concerning 
calculating short positions, when a natural or legal person has an uncovered position in a credit 
default  swap,  notification  or  disclosure  thresholds  and  further  specification  of  criteria  and 
factors  for  determining  when  an  adverse  event  or  development  creates  a  serious  threat  to 
financial stability or to market confidence in a Member State or the Union. 

(35)  The Commission should submit a report to the European Parliament and the Council assessing 
the appropriateness of the reporting and public disclosure thresholds provided for, the operation 
of  the  restrictions  and  requirements  related  to  the  transparency  of  net  short  positions  and 
whether  any  other  restrictions  or  conditions  on  short  selling  or  credit  default  swaps  are 
appropriate.  

16 
17 
18 

OJ L 281, 23.11.1995, p. 31. 
OJ L 8, 12.1.2001, p. 1. 
OJ L 184, 17.7.1999, p. 23. 

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(36)  Though national competent authorities are better placed to monitor and have better knowledge 
of market developments, the overall impact of the problems related to short selling and credit 
default swaps can only be fully perceived in a Union context. For this reason, the objectives of 
this  Regulation  can  be  better  achieved  at  the  Union  level;  the  Union  may  adopt  measures,  in 
accordance with the principle of subsidiarity as set out in Article 5 of the Treaty on European 
Union.  In  accordance  with  the  principle  of  proportionality,  as  set  out  in  that  Article,  this 
Regulation does not go beyond what is necessary in order to achieve those objectives. 

(37)  Since  some  Member  States  have  already  put  in  place  restrictions  on  short  selling  and  since 
delegated acts and binding technical standards are provided for which should be adopted before 
the  framework  to  be  introduced  can  be  usefully  applied,  it  is  necessary  to  provide  for  a 
sufficient period of time. 

HAVE ADOPTED THIS REGULATION: 

CHAPTER I 
GENERAL PROVISIONS 

Article 1 
Scope 

This Regulation shall apply to the following financial instruments: 

(1) 

(2) 

(3) 

financial instruments that are admitted to trading on a trading venue in the Union, including 
such instruments when traded outside a trading venue; 

derivatives  set  out  in  Annex  I  Section  C  points  (4)  to  (10)  of  Directive  2004/39/EC  of  the 
European  Parliament  and  of  the  Council19  that  relate  to  a  financial  instrument  referred  to  in 
paragraph (1) or an issuer of a financial instrument referred to in paragraph (1), including such 
derivatives when traded outside a trading venue; 

debt  instruments  issued  by  a  Member  State  or  the  Union  and  derivatives  set  out  in  Annex  I 
Section  C  points  (4)  to  (10)  of  Directive  2004/39/EC  that  relate  to  such  debt  instruments 
issued by a Member State or the Union or to an obligation of a Member State or the Union. 

Article 2 
Definitions 

1. 

For the purpose of this Regulation, the following definitions shall apply: 

(a) 

"authorised  primary  dealer"  means  a  natural  or  legal  person  who  has  signed  an 
agreement  with  an  issuer  of  sovereign  debt  under  which  that  natural  or  legal  person 
commits  to  deal  as  principal  in  connection  with  primary  and  secondary  market 
operations relating to debt issued by that issuer; 

19 

OJ L 145, 30.4.2004, p. 1. 

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(b) 

(c) 

(d) 

(e) 

(f) 

(g) 

(h) 

"central  counterparty"  means  an  entity  that  legally  interposes  itself  between  the 
counterparties  to  the  contracts  traded  within  one  or  more  financial  markets,  becoming 
the buyer to every seller and the seller to every buyer and which is responsible for the 
operation of a clearing system; 

"credit  default  swap"  means  a  derivative  contract  in  which  one  party  pays  a  fee  to 
another  party  in  return  for  compensation  or  a  payment  in  the  event  of  a  default  by  a 
reference  entity,  or  a  credit  event  relating  to  that  reference  entity  and  any  other 
derivative contract that has a similar economic effect; 

"financial  instrument"  means  any  of  the  instruments  listed  in  Annex  I,  Section  C  of 
Directive 2004/39/EC  

"Home Member State" of a regulated market, an investment firm operating a multilateral 
trading  facility  or  any  other  investment  firm,  means  the  Home  Member  State  for  that 
regulated market or investment firm within the meaning of Article 4(1)(20) of Directive 
2004/39/EC; 

"investment  firm"  means  an  investment  firm  within  the  meaning  of  Article  4(1)(1)  of 
Directive 2004/39/EC; 

"sovereign  debt"  means  a  debt  instrument  issued  by  the  Union,  or  a  Member  State 
including  any  ministry,  department,  central  bank,  agency  or  instrumentality  of  the 
Member State; 

"issued  share  capital"  in  relation  to  a  company,  means  the  total  of  ordinary  and  any 
preference  shares  issued  by  the  company  but  does  not  include  convertible  debt 
securities; 

(i) 

"issued sovereign debt" means: 

(i) 

in  relation  to  a  Member  State,  the  total  value  of  sovereign  debt  issued  by  the 
Member State or any ministry, department, central bank, agency or instrumentality 
of the Member State that has not been redeemed;  

(ii) 

in relation to the Union, the total value of sovereign debt issued by the Union that 
has not been redeemed; 

(j) 

"local firm" means a firm referred to in Article 2(1)(l) of Directive 2004/39/EC which 
deals for the account of other members of a market or makes prices for them; 

(k) 

"market making activity" means an activity referred to in Article 15(1) ; 

(l) 

"multilateral trading facility (MTF)" means a multilateral system within the meaning of 
Article 4(1)(15) of Directive 2004/39/EC; 

(m)  "principal venue" in relation to a share means the venue for the trading of that share with 

the highest turnover; 

(n) 

"regulated market" means a multilateral system within the meaning of Article 4(1)(14) 
of Directive 2004/39/EC; 

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(o) 

"relevant competent authority" means: 

(i) 

(ii) 

(iii) 

in relation to sovereign debt of a Member State or a credit default swap relating to 
an obligation of a Member State, the competent authority of that Member State;  

in  relation  to  sovereign  debt  of  the  Union  or  a  credit  default  swap  relating  to  an 
obligation  of  the  Union,  the  competent  authority  of  the  jurisdiction  in  which  the 
European Financial Stability Facility is established;  

in relation to a financial instrument other than an instrument referred to in point (i) 
or (ii), the competent authority for that financial instrument as defined in Article 
2(7) of Commission Regulation (EC) No 1287/2006 and determined in accordance 
with Chapter III of that Regulation; 

(iv) 

in relation to a financial instrument that is not covered under point (i), (ii) or (iii), 
the competent authority of the Member State in which the financial instrument was 
first admitted to trading on a trading venue. 

(p) 

"short sale" in relation to a share or debt means any sale of the share or debt which the 
seller  does  not  own  at  the  time  of  entering  into  the  agreement  to  sell  including  such  a 
sale where at the time of entering into the agreement to sell the seller has borrowed or 
agreed to borrow the share or debt for delivery at settlement; 

(q) 

"trading day" means a trading day within the meaning of Article 4 of Regulation (EC) 
No 1287/2006; 

(r) 

"trading venue" means a regulated market or a MTF in the Union; 

(s) 

"turnover" of a share, means turnover as defined in Article 2(9) of Regulation (EC) No 
1287/2006. 

The  Commission  may  adopt,  by  means  of  delegated  acts  in  accordance  with  Article  36  and 
subject to the conditions of Articles 37 and 38, measures specifying the definitions laid down 
in paragraph 1, in particular specifying when a natural or legal person is considered to own a 
financial instrument for the purposes of the definition of short sale in paragraph 1(p). 

Article 3 
Short and long positions 

For the purposes of this Regulation, a position resulting from either of the following shall be 
considered  a  short  position  relating  to  the  issued  share  capital  of  a  company  or  issued 
sovereign debt of a Member State or the Union: 

(a) 

(b) 

a short sale of a share issued by the company or a debt instrument issued by the Member 
State or Union;  

a natural or legal person entering into transaction which creates or relates to a financial 
instrument other than the instruments referred to in point (a) and the effect or one of the 
effects of the transaction is to confer a financial advantage on the natural or legal person 
in the event of a decrease in the price or value of the share or debt instrument.  

2. 

1. 

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2. 

For the purposes of this Regulation, a position resulting from either of the following shall be 
considered  a  long  position  relating  to  the  issued  share  capital  of  a  company  or  issued 
sovereign debt of a Member State or the Union: 

3. 

4. 

5. 

6. 

7. 

(a) 

(b) 

holding a share issued by the company or a debt instrument issued by the Member State 
or Union;  

a natural or legal person entering into a transaction which creates or relates to a financial 
instrument other than the instruments referred to in point (a) and the effect or one of the 
effects of the transaction is to confer a financial advantage on the natural or legal person 
in the event of an increase in the price or value of the share or debt instrument. 

For the purposes of paragraphs 1 and 2 the calculation of a short position and a long position 
relating to sovereign debt shall include any credit default swap that relates to an obligation or a 
credit event relating to a Member State or the Union. 

For the purposes of this Regulation, the position remaining after deducting any long position 
that a natural or legal person holds in relation to the issued share capital of a company from 
any  short  position  that  that  natural  or  legal  person  holds  in  relation  to  that  capital  shall  be 
considered a net short position in relation to the issued share capital of that company.  

For the purposes of this Regulation, the position remaining after deducting any long position 
that a natural or legal person holds in relation to the issued sovereign debt of a Member State 
or the Union from any short position that that natural or legal person holds in relation to the 
same debt shall be considered a net short position in relation to the issued sovereign debt of a 
Member State or the Union.  

The calculation under paragraphs 1 to 5 for sovereign debt shall be for each single Member 
State  or  for  the  Union  even  if  separate  entities  within  the  Member  State  or  the  Union  issue 
sovereign debt on behalf of the Member State or Union.  

The  Commission  shall  adopt,  by  means  of  delegated  acts  in  accordance  with  Article  36  and 
subject to the conditions of Articles 37 and 38, measures specifying: 

(a)  where a natural or legal person is considered to hold a share or debt instrument for the 

purposes of paragraph 2; 

(b) 

(c) 

cases  in  which  a  natural  or  legal  person  has  a  net  short  position  for  the  purposes  of 
paragraphs 4 and 5 and the method of calculation of the position; 

the  method  of  calculating  positions  for  the  purposes  of  paragraphs  3,  4  and  5  when 
different  entities  in  a  group  have  long  or  short  positions  or  for  fund  management 
activities related to separate funds. 

Article 4 
Uncovered position in a credit default swap 

1. 

For the purposes of this Regulation, a natural or legal person shall be considered to have an 
uncovered position in a credit default swap relating to an obligation of a Member State or the 
Union,  to  the  extent  that  the  credit  default  swap  is  not  serving  to  hedge  against  the  risk  of 

EN 

21 

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default of the issuer where the natural or legal person has a long position in the sovereign debt 
of that issuer or any long position in the debt of an issuer for which the price of its debt has a 
high  correlation  with  the  price  of  the  obligation  of  a  Member  State  or  the  Union.  The  party 
under a credit default swap that is obliged to make the payment or pay the compensation in the 
event of a default or a credit event relating to the reference entity does not by reason of that 
obligation have an uncovered position for the purposes of this paragraph. 

2. 

The  Commission  shall  adopt,  by  means  of  delegated  acts  in  accordance  with  Article  36  and 
subject to the conditions of Articles 37 and 38, measures specifying: 

(a) 

(b) 

cases  in  which  a  credit  default  swap  transaction  is  considered  to  be  hedging  against  a 
default  risk,  for  the  purposes  of  paragraph  1,  and  the  method  of  calculation  of  an 
uncovered position in a credit default swap for the purposes of that paragraph;  

the  method  of  calculating  positions  for  the  purposes  of  paragraph  1  when  different 
entities in a group have long or short positions or for fund management activities related 
to separate funds.  

CHAPTER II 
TRANSPARENCY OF NET SHORT POSITIONS 

Article 5 
Notification to competent authorities of significant net short positions in shares 

1. 

2. 

3. 

A natural or legal person who has a net short position in relation to the issued share capital of 
a  company  that  has  shares  admitted  to  trading  on  a  trading  venue  shall  notify  the  relevant 
competent  authority  whenever  the  position  reaches  or  falls  below  a  relevant  notification 
threshold referred to in paragraph 2. 

A  relevant  notification  threshold  is  a  percentage  that  equals  0.2%  of  the  value  of  the  issued 
share capital of the company concerned and each 0.1% above that. 

The Commission may, by means of delegated acts in accordance with Article 36 and subject to 
the conditions of Articles 37 and 38, modify the thresholds mentioned in paragraph 2, taking 
into account the developments in financial markets. 

Article 6 
Marking of short orders on trading venue 

A trading venue that has shares admitted to trading shall establish procedures that ensure that natural or 
legal  persons  executing  orders  on  the  trading  venue  mark  sell  orders  as  short  orders  if  the  seller  is 
entering into a short sale of the share. The trading venue shall publish at least daily a summary of the 
volume of orders marked as short orders. 

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Article 7 
Public disclosure of significant net short positions in shares 

1. 

2. 

3. 

A natural or legal person who has a net short position in relation to the issued share capital of 
a company that has shares admitted to trading on a trading venue shall disclose to the public 
details  of  the  position  whenever  the  position  reaches  or  falls  below  a  relevant  publication 
threshold referred to in paragraph 2. 

A  relevant  publication  threshold  is  a  percentage  that  equals  0.5%  of  the  value  of  the  issued 
share capital of the company concerned and each 0.1% above that.  

The Commission may, by means of delegated acts in accordance with Article 36 and subject to 
the conditions of Articles 37 and 38, modify the thresholds mentioned in paragraph 2, taking 
into account the developments in financial markets. 

Article 8 
Notification to competent authorities of significant net short positions in sovereign debt and credit 
default swaps 

1. 

2. 

3. 

A  natural  or  legal  person  who  has  any  of  the  following  positions  shall  notify  the  relevant 
competent authority whenever any such position reaches or falls below a relevant notification 
threshold for the Member State concerned or the Union: 

(a) 

(b) 

a  net  short  position  relating  to  the  issued  sovereign  debt  of  a  Member  State  or  of  the 
Union;  

an  uncovered  position  in  a  credit  default  swap  relating  to  an  obligation  of  a  Member 
State or the Union.  

The  relevant  notification  thresholds  shall  consist  of  an  initial  amount  and  then  additional 
incremental  levels  in  relation  to  each  Member  State  and  the  Union,  as  specified  in  the 
measures taken by the Commission in accordance with paragraph 3. 

The Commission shall, by means of delegated acts in accordance with Article 36 and subject 
to the conditions of Articles 37 and 38, specify the amounts and incremental levels referred to 
in paragraph 2. It shall take into account all of the following elements: 

(a) 

(b) 

that the thresholds shall not be set at such a level as to require notification of positions 
which are of minimal value;  

the  total  value  of  outstanding  issued  sovereign  debt  for  each  Member  State  and  the 
Union  and  the  average  size  of  positions  held  by  market  participants  relating  to  the 
sovereign debt of that Member State or the Union. 

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1. 

2. 

3. 

4. 

5. 

6. 

Article 9 
Method of notification and disclosure  

Any notification or disclosure under Articles 5, 7 or 8 shall set out details of the identity of the 
natural  or  legal  person  who  has  the  relevant  position,  the  size  of  the  relevant  position,  the 
issuer  in  relation  to  which  the  relevant  position  is  held  and  the  date  on  which  the  relevant 
position was created, changed or ceased to be held. 

The relevant time for calculation of a net short position shall be at 12.00 pm of the trading day 
on which the natural or legal person has the relevant position. The notification or disclosure 
shall be made not later than 3.30 pm on the next trading day.  

The notification of information to a relevant competent authority shall be made in accordance 
with the system set out in Article 12(1) of Regulation (EC) No 1287/2006.  

The public disclosure of information set out in Article 7 shall be made in a manner ensuring 
fast  access  to  information  on  a  non-discriminatory  basis.  The  information  shall  be  made 
available to the officially appointed mechanism of the home Member State of the issuer of the 
shares referred to in Article 21(2) of Directive 2004/109/EC of the European Parliament and 
of the Council20. 

Powers are delegated to the Commission to adopt regulatory technical standards specifying the 
details of the information to be provided for the purposes of paragraph 1.  

The regulatory standards referred to in the first subparagraph shall be adopted in accordance 
with Articles [7 to 7d] of Regulation (EU) No …/….[ESMA Regulation]. 

ESMA shall submit drafts for those regulatory technical standards to the Commission by [ 31 
December 2011] at the latest. 

In  order  to  ensure  uniform  conditions  of  application  of  paragraph  4  powers  are  conferred  to 
the  Commission  to  adopt  implementing  technical  standards  specifying  the  means  by  which 
information may be disclosed to the public. 

The implementing technical standards referred to in the first subparagraph shall be adopted in 
accordance with Article [7e] of Regulation (EU) No …/….[ESMA Regulation]. 

ESMA shall submit drafts for those implementing technical standards to the Commission by 
[31 December 2011] at the latest. 

20 

OJ L 390, 31.12.2004, p. 38. 

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Article 10 
Application outside the Union 

The notification and disclosure requirements under Articles 5, 7 and 8 apply to natural or legal persons 
whether residing or established within or outside the Union.  

Article 11 
Information to be provided to ESMA  

1. 

2. 

Competent  authorities  shall  provide  information  in  summary  form  to  ESMA  on  a  quarterly 
basis  on  net  short  positions  relating  to  shares  or  sovereign  debt,  and  uncovered  positions 
relating to credit default swaps, for which it is the relevant competent authority and receives 
notifications under Articles 5 to 8. 

ESMA  may  request  at  any  time,  in  order  to  carry  out  its  duties  under  this  Regulation, 
additional information from a relevant competent authority of a Member State about net short 
positions relating to shares or sovereign debt or uncovered positions relating to credit default 
swaps.  

The competent authority shall provide the requested information to ESMA at the latest within 
seven calendar days.  

CHAPTER III 
UNCOVERED SHORT SALES 

Article 12 
Restrictions on uncovered short sales 

1. 

A natural or legal person may only enter into a short sale of a share admitted to trading on a 
trading  venue  or  a  short  sale  of  a  sovereign  debt  instrument  where  one  of  the  following 
conditions is fulfilled: 

(a) 

the natural or legal person has borrowed the share or sovereign debt instrument; 

(b) 

(c) 

the  natural  or  legal  person  has  entered  into  an  agreement  to  borrow  the  share  or 
sovereign debt instrument; 

the natural or legal person has an arrangement with a third party under which that third 
party  has  confirmed  that  the  share  or  sovereign  debt  instrument  has  been  located  and 
reserved  for  lending  for  the  natural  or  legal  person  so  that  settlement  can  be  effected 
when it is due. 

2. 

In  order  to  ensure  uniform  conditions  of  application  of  paragraph  1  powers  are  conferred  to 
the  Commission  to  adopt  implementing  technical  standards  identifying  the  types  of 
agreements or arrangements that adequately ensure that the share or sovereign debt instrument 
will be available for settlement. 

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The Commission shall in particular take into account the need to preserve liquidity of markets 
especially sovereign bond market and sovereign bond repurchase markets (repo markets). 

The implementing technical standards referred to in the first subparagraph shall be adopted in 
accordance with Article [7e ]of Regulation (EU) No …/….[ESMA Regulation]. 

ESMA shall submit drafts for those implementing technical standards to the Commission by 1 
January 2012] at the latest.  

Article 13 
Buy-in procedures and fines for late settlement 

1. 

A trading venue that has shares or sovereign debt admitted to trading shall ensure that it, or the 
central  counterparty  that  provides  clearing  services  for  the  trading  venue,  has  procedures  in 
place which comply with all of the following requirements: 

(a)  where  a  natural  or  legal  person  who  sells  shares  or  sovereign  debt  instruments  on  the 
venue is not able to deliver the shares or sovereign debt instrument for settlement within 
four trading days after the day on which the trade takes place, or six trading days after 
the  day  on  which  the  trade  takes  place  in  the  case  of  market  making  activities,  then 
procedures  are  automatically  triggered  for  the  trading  venue  or  central  counterparty  to 
buy-in the shares or sovereign debt instrument to ensure delivery for settlement;  

(b)  where  the  trading  venue  or  central  counterparty  is  not  able  to  buy-in  the  shares  or  the 
sovereign  debt  instrument  for  delivery  then  cash  compensation  is  paid  by  the  trading 
venue  or  the  central  counterparty  to  the  buyer  based  on  the  value  of  the  shares  or  the 
debt to be delivered at the delivery date plus an amount for any losses incurred by the 
buyer;  

(c) 

the  natural  or  legal  person  who  fails  to  settle  pays  an  amount  to  the  trading  venue  or 
central  counterparty  to  reimburse  the  trading  venue  or  central  counterparty  for  all 
amounts paid pursuant to points (a) and (b). 

A trading venue that has shares or sovereign debt instruments admitted to trading shall ensure 
that it has procedures in place, or that the settlement system that provides settlement services 
for the shares or sovereign debt instrument has procedures in place, which ensure that where a 
natural  or  legal  person  who  sells  shares  or  sovereign  debt  instrument  on  the  venue  fails  to 
deliver the shares or sovereign debt instrument for settlement by the date on which settlement 
is due, then such natural or legal person is subject to the obligation to make daily payments to 
the trading venue or settlement system for each day that the failure continues. 

The daily payments shall be sufficiently high not to allow the seller to make a profit from the 
settlement failure and to act as a deterrent to natural or legal persons failing to settle. 

A trading venue that has shares or sovereign debt admitted to trading shall have in place rules 
that enable it to prohibit a natural or legal person that is a member of the trading venue from 
entering into further short sales of shares or sovereign debt instruments on the trading venue as 
long as that person fails to settle a transaction resulting from a short sale on that trading venue. 

2. 

3. 

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CHAPTER IV 
EXEMPTIONS 

1. 

2. 

3. 

Article 14 
Exemption where the principal trading venue is outside the Union 

Articles 5, 7, 12 and 13 shall not apply to shares of a company admitted to trading on a trading 
venue  in  the  Union  where  the  principal  venue  for  the  trading  of  the  shares  is  located  in  a 
country outside the Union. 

The relevant competent authority for shares of a company that are traded on a trading venue in 
the  Union  and  a  venue  located  outside  the  Union  shall  determine,  at  least  every  two  years, 
whether the principal venue for the trading of those shares is located outside the Union.  

The relevant competent authority shall notify ESMA of any such shares identified as having 
their principal venue located outside the Union. 

ESMA  shall  publish  the  list  of  shares  for  which  the  principal  venue  is  located  outside  the 
Union every two years. The list shall be effective for a two year period.  

Powers are delegated to the Commission to adopt regulatory technical standards specifying the 
method  for  calculation  of  the  turnover  to  determine  the  principal  venue  for  the  trading  of  a 
share.  

The regulatory standards referred to in the first subparagraph shall be adopted in accordance 
with Articles [7 to 7d] of Regulation (EU) No …/….[ESMA Regulation]. 

ESMA shall submit drafts for those regulatory technical standards to the Commission by [31 
December 2011] at the latest. 

4. 

In  order  to  ensure  uniform  conditions  of  application  of  paragraphs  1  and  2  powers  are 
conferred on the Commission to adopt implementing technical standards to determine:  

(a) 

(b) 

the date on which and period in respect of which any calculation of the principal venue 
for a share shall be made; 

the  date  by  which  the  relevant  competent  authority  shall  notify  ESMA  of  those  shares 
where the principal venue is outside the Union;  

(c) 

the date from which the list shall be effective following publication by ESMA . 

The implementing technical standards referred to in the first subparagraph shall be adopted in 
accordance with Article [7e] of Regulation (EU) No …/….[ESMA Regulation]. 

ESMA shall submit drafts for those implementing technical standards to the Commission by 
[31 December 2011] at the latest. 

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27 

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1. 

2. 

Article 15 
Exemption for market making and primary market operations 

Articles  5,  6,  7,  8  and  12  shall  not  apply  to  the  activities  of  an  investment  firm  or  a  third 
country  entity  or  a  local  firm  that  is  a  member  of  a  trading  venue  or  of  a  market  in  a  third 
country,  whose  legal  and  supervisory  framework  has  been  declared  equivalent  pursuant  to 
paragraph 2, when it deals as principal in a financial instrument, whether traded on or outside 
a trading venue, in either or both of the following capacities: 

(a) 

by  posting  firm,  simultaneous  two  way  quotes  of  comparable  size  and  at  competitive 
prices,  with  the  result  of  providing  liquidity  on  a  regular  and  ongoing  basis  to  the 
market;  

(b) 

as  part  of  its  usual  business,  by  fulfilling  orders  initiated  by  clients  or  in  response  to 
clients' requests to trade, and by hedging positions arising out of those dealings.  

The  Commission  may,  in  accordance  with  the  procedure  referred  to  in  Article  39(2),  adopt 
decisions  ,  determining  that  the  legal  and  supervisory  framework  of  a  third  country  ensures 
that  a  market  authorised  in  that  third  country  complies  with  legally  binding  requirements 
which  are,  for  the  purpose  of  the  application  of  the  exemption  set  out  in  paragraph  1, 
equivalent  to  the  requirements  resulting  from  Title  III  of  Directive  2004/39/EC,  from 
Directive  2003/6/EC  of  the  European  Parliament  and  of  the  Council21  and  Directive 
2004/109/EC,  and  which  are  subject  to  effective  supervision  and  enforcement  in  that  third 
country.  

The legal and supervisory framework of a third country may be considered equivalent where 
that framework fulfils all the following conditions:  

(a)  markets in that third country are subject to authorisation and to effective supervision and 

enforcement on an ongoing basis;  

(b)  markets have clear and transparent rules regarding admission of securities to trading so 
that  such  securities  are  capable  of  being  traded  in  a  fair,  orderly  and  efficient  manner, 
and are freely negotiable;  

(c) 

(d) 

security issuers are subject to periodic and ongoing information requirements ensuring a 
high level of investor protection;  

it ensures market transparency and integrity by preventing market abuse in the form of 
insider dealing and market manipulation.  

3. 

Articles 8 and 12 shall not apply to the activities of a natural or legal person when, acting as an 
authorised  primary  dealer  pursuant  to  an  agreement  with  an  issuer  of  sovereign  debt,  it  is 
dealing  as  principal  in  a  financial  instrument  in  relation  to  primary  or  secondary  market 
operations relating to the sovereign debt. 

21 

OJ L 96, 12.4.2003, p. 16. 

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4. 

5. 

6. 

7. 

8. 

9. 

Articles 5, 6, 7 and 12 shall not apply to a natural or legal person when it enters into a short 
sale  of  a  security  or  has  a  net  short  position  in  relation  to  the  carrying  out  of  a  stabilisation 
under Chapter III of Commission Regulation (EC) No 2273/200322.  

The exemptions referred to in paragraphs 1 and 3 shall only apply where the natural or legal 
person  concerned  has  first  notified  the  competent  authority  of  its  home  Member  State,  in 
writing that they intend to make use of the exemption. The notification shall be made not less 
than thirty calendar days before the natural or legal person intends to use the exemption. 

The competent authority of the home Member State may prohibit the use of the exemption if it 
considers that the natural or legal person does not satisfy the conditions of the exemption. Any 
prohibition  shall  be  imposed  within  the  thirty  calendar  day  period  referred  to  in  the  first 
subparagraph  or  subsequently  if  the  competent  authority  becomes  aware  that  there  has  been 
any changes in the circumstances of the person so that they no longer satisfy the conditions.  

A third country entity that is not authorised in the Union shall send the notification referred to 
in paragraph 5 to the competent authority of the main trading venue in the Union in which it 
trades.  

A  natural  or  legal  person  which  has  given  a  notification  under  paragraph  5  shall  as  soon  as 
possible notify the competent authority of its home Member State in writing where there are 
any changes affecting its eligibility to use the exemption.  

The competent authority of the home Member State may request information, in writing, from 
a natural or legal person operating under the exemptions set out in paragraph 1, 3 or 4 about 
short positions held or activities conducted under the exemption. The natural or legal person 
shall provide the information not later than four calendar days after the request is made at the 
latest.  

10. 

The  relevant  competent  authority  shall  notify  ESMA  within  two  weeks  of  notification  in 
accordance with paragraph 5 or 8 of any market makers and authorised primary dealers who 
are  making  use  of  the  exemption  and  of  any  market  makers  and  authorised  primary  dealers 
who are no longer making use of the exemption. 

11. 

ESMA shall publish on its website a list of market makers and authorised primary dealers who 
are using the exemption and keep it up to date. 

CHAPTER V 
POWERS OF INTERVENTION OF COMPETENT AUTHORITIES 
AND OF ESMA 

Section 1 
Powers of Competent Authorities 

22 

OJ L 336, 23.12.2003, p. 33. 

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29 

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Article 16 
Disclosure in exceptional situations 

1. 

2. 

1. 

The competent authority of a Member State may require natural or legal persons who have net 
short positions in relation to a specific financial instrument or class of financial instruments to 
notify  it  or  to  disclose  to  the  public  details  of  the  position  whenever  the  position  reaches  or 
falls below a notification threshold fixed by the competent authority, where all the following 
conditions are fulfilled: 

(a) 

there  are  adverse  events  or  developments  which  constitute  a  serious  threat  to  financial 
stability  or  to  market  confidence  in  the  Member  State  or  one  or  more  other  Member 
States;  

(b) 

the measure is necessary to address the threat. 

Paragraph 1 shall not apply to financial instruments in respect of which transparency is already 
required under Articles 5 to 8 Chapter II. 

Article 17 
Restrictions on short selling and similar transactions in exceptional situations 

The competent authority of a Member State may take the measure referred to in paragraphs 2 
or 3, where all of the following conditions are fulfilled: 

(a) 

there  are  adverse  events  or  developments  which  constitute  a  serious  threat  to  financial 
stability  or  to  market  confidence  in  the  Member  State  or  one  or  more  other  Member 
States;  

(b) 

the measure is necessary to address the threat. 

2. 

The  competent  authority  of  the  Member  State  may  prohibit  or  impose  conditions  relating  to 
natural or legal persons entering into:  

(a) 

a short sale;  

3. 

4. 

(b) 

a transaction other than a  short sale  which creates, or relates to, a  financial instrument 
and the effect or one of the effects of that transaction is to confer a financial advantage 
on the natural or legal person in the event of a decrease in the price or value of another 
financial instrument. 

The  competent  authority  of  the  Member  State  may  prevent  natural  or  legal  persons  from 
entering into transactions relating to financial instruments or limit the value of transactions in 
the financial instrument that may be entered into. 

A  measure  under  paragraph  2  or  3  may  apply  to  transactions  concerning  all  financial 
instruments,  financial  instruments  of  a  specific  class  or  a  specific  financial  instrument.  The 
measure  may  apply  in  circumstances  or  be  subject  to  exceptions  specified  by  the  relevant 
competent  authority.  Exceptions  may  in  particular  be  specified  to  apply  to  market  making 
activities and primary market activities. 

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Article 18 
Restrictions on credit default swap transactions in exceptional situations 

1. 

2. 

The competent authority of a Member State may limit natural or legal persons from entering 
into credit default swap transactions relating to an obligation of a Member State or the Union 
or  limit  the  value  of  uncovered  credit  default  swap  positions  that  may  be  entered  into  by 
natural  or  legal  persons  that  relate  to  an  obligation  of  a  Member  State  or  the  Union,  where 
both the following conditions are fulfilled: 

(a) 

there  are  adverse  events  or  developments  which  constitute  a  serious  threat  to  financial 
stability  or  to  market  confidence  in  the  Member  State  or  one  or  more  other  Member 
States;  

(b) 

the measure is necessary to address the threat. 

A measure under paragraph 1 may apply to credit default swap transactions of a specific class 
or to specific credit default swap transactions. The measure may apply in circumstances or be 
subject  to  exceptions  specified  by  the  competent  authority.  Exceptions  may  in  particular  be 
specified to apply to market making activities and primary market activities. 

Article 19 
Power to temporarily restrict short selling of financial instruments in case of a significant fall in 
price  

1. 

2. 

3. 

4. 

Where the price of a financial instrument on a trading venue has during a single trading day 
fallen  by  the  value  referred  to  in  paragraph  4  from  the  closing  price  on  that  venue  on  the 
previous trading day, the competent authority of the home Member State for that venue shall 
consider whether it is appropriate to prohibit or restrict natural or legal persons from engaging 
in short selling of the financial instrument on the trading venue or otherwise limit transactions 
in that financial instrument on that trading venue in order to prevent a disorderly decline in the 
price of the financial instrument.  

Where the competent authority is satisfied under the first subparagraph that it is appropriate to 
do  so,  it  shall  in  the  case  of  a share  or  debt  prohibit  or  restrict  persons  from  entering  into  a 
short  sale  on  the  trading  venue  or  in  the  case  of  another  type  of  financial  instrument,  limit 
transactions in that financial instrument on that trading venue.  

The measure shall apply for a period not exceeding the end of the trading day following the 
trading day on which the fall in price occurs.  

The  measure  shall  apply  in  circumstances  or  be  subject  to  exceptions  specified  by  the 
competent  authority.  Exceptions  may  in  particular  be  specified  to  apply  to  market  making 
activities and primary market activities. 

The fall in value shall be 10% or more in the case of a share and for other classes of financial 
instruments an amount to be specified by the Commission. 

The Commission shall, by means of delegated acts in accordance with Article 36 and subject 
to the conditions of Articles 37 and 38, specify the fall in value for financial instruments other 
than shares, taking into account the specificities of each class of financial instrument. 

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5. 

Powers are delegated to the Commission to adopt regulatory technical standards specifying the 
method  of  calculation  of  the  10%  fall  for  shares  and  of  the  fall  in  value  specified  by  the 
Commission as referred to in paragraph 4.  

The regulatory standards referred to in the first subparagraph shall be adopted in accordance 
with Articles [7 to 7d] of Regulation (EU) No …/….[ESMA Regulation]. 

ESMA shall submit drafts for those regulatory technical standards to the Commission by [31 
December 2011] at the latest. 

Article 20 
Period of restrictions 

Any  measure  imposed  under  Article  16  to  18  shall  be  valid  for  an  initial  period  not  exceeding  three 
months from the date of publication of the notice referred to in Article 21.  

Any such measure may be renewed for further periods not exceeding three months at a time. 

Article 21 
Notice of restrictions 

1. 

2. 

3. 

1. 

2. 

A competent authority shall publish on its website notice of any decision to impose or renew 
any measure referred to in Articles 16 to 19. 

The notice shall specify at least details of: 

(a) 

(b) 

the measures imposed including the instruments and class of transactions to which they 
apply and the duration of the measures;  

the reasons why the competent authority believes it is necessary to impose the measures 
including the evidence supporting the reasons. 

A measure under Articles 16 to 19 shall take effect when the notice is published or at a time 
specified  in  the  notice  that  is  after  its  publication  and  shall  only  apply  in  relation  to  a 
transaction entered into after the measure takes effect. 

Article 22 
Notification to ESMA and other competent authorities 

Before imposing or renewing any measure under Article 16, 17 or 18 and before imposing any 
restriction  under  Article  19,  a  competent  authority  shall  notify  ESMA  and  other  competent 
authorities of the measure it proposes. 

The  notification  shall  include  details  of  the  proposed  measures,  the  class  of  financial 
instruments and transactions to which they will apply, the evidence supporting those reasons 
and when the measures are intended to take effect. 

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3. 

4. 

1. 

2. 

3. 

1. 

Notification of a proposal to impose or renew a measure under Articles 16, 17 and 18 shall be 
made not less than 24 hours before the measure is intended to take effect or to be renewed. In 
exceptional circumstances, a competent authority may make the notification less than 24 hours 
before the measure is intended to take effect where it is not possible to give 24 hours notice. A 
notification under Article 19 shall be made before the measure is intended to take effect. 

A competent authority of a Member State that receives notification under this Article may take 
measures in accordance with Articles 16 to 19 in that Member State where it is satisfied that 
the measure is necessary to assist the other competent authority. The competent authority shall 
also give notice in accordance with paragraphs 1 to 3 where it proposes to take measures. 

Section 2 
Powers of ESMA 

Article 23 
Coordination by ESMA 

ESMA  shall  perform  a  facilitation  and  coordination  role  in  relation  to  measures  taken  by 
competent  authorities  under  Section  1  In  particular  ESMA  shall  ensure  that  a  consistent 
approach  is  taken  by  competent  authorities  regarding  measures  under  Section  1  especially 
regarding  when  it  is  necessary  to  use  powers  of  intervention  under  Section  1,  the  nature  of 
measures imposed and the commencement and duration of any measures. 

After receiving notification under Article 22 of any measure that is to be imposed or renewed 
under  Article  16,  17  or  18,  ESMA  shall  within  24  hours  issue  an  opinion  on  whether  it 
considers the measure or proposed measure is necessary to address the exceptional situation. 
The  opinion  shall  state  whether  ESMA  considers  that  adverse  events  or  developments  have 
arisen which constitute a serious threat to financial stability or to market confidence in one or 
more  Member  States,  whether  the  measure  or  proposed  measure  is  appropriate  and 
proportionate  to  address  the  threat  and  whether  the  proposed  duration  of  the  measures  is 
justified.  If  ESMA  considers  that  measure  by  other  competent  authorities  is  necessary  to 
address  the  threat,  it  shall  also  state  it  in  the  opinion.  The  opinion  shall  be  published  on 
ESMA's website. 

Where a competent authority proposes to take or takes measures contrary to an ESMA opinion 
under  paragraph  2  or  declines  to  take  measures  contrary  to  an  ESMA  opinion  under  that 
paragraph it shall immediately publish on its website a notice fully explaining its reasons for 
doing so. 

Article 24 
ESMA intervention powers  

In accordance with Article [6a(5)] of Regulation (EU) No …/…. [ESMA Regulation], ESMA 
shall,  where  all  conditions  in  paragraph  2  are  satisfied,  take  one  or  more  of  the  following 
measures: 

(a) 

require  natural  or  legal  persons  who  have  net  short  positions  in  relation  to  a  specific 
financial instrument or class of financial instruments to notify a competent authority or 
to disclose to the public details of any such position; 

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(b)  prohibit  or  impose  conditions  relating  to  natural  or  legal  persons  entering  into  a  short 
sale or a transaction which creates, or relates to, a financial instrument and the effect or 
one of the effects of the transaction is to confer a financial advantage on the natural or 
legal  person  in  the  event  of  a  decrease  in  the  price  or  value  of  another  financial 
instrument; 

(c) 

limit natural or legal persons from entering into credit default swap transactions relating 
to an obligation of a Member State or the Union or limit the value of uncovered credit 
default  swap  positions  that  a  natural  or  legal  person  may  enter  into  relating  to  an 
obligation of a Member State or the Union; 

(d)  prevent  natural  or  legal  persons  from  entering  into  transactions  relating  to  a  financial 
instruments  or  limit  the  value  of  transactions  in  the  financial  instrument  that  may  be 
entered into. 

A measure may apply in circumstances or be subject to exceptions specified by the relevant 
competent  authority.  Exceptions  may  in  particular  be  specified  to  apply  to  market  making 
activities and primary market activities. 

2. 

ESMA  shall  only  take  a  decision  under  paragraph  1  if  all  of  the  following  conditions  are 
fulfilled: 

(a) 

the  measures  listed  in  points  (a)  to  (d)  of  paragraph  1  address  a  threat  to  the  orderly 
functioning and integrity of financial markets or the stability of the whole or part of the 
financial system in the Union and there are cross border implications;  

(b) 

a competent authority or competent authorities have not taken measures to address the 
threat or measures that have been taken do not sufficiently address the threat. 

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3. 

When taking measures referred to in paragraph 1 ESMA shall take into account the extent to 
which the measure: 

(a)  will significantly address the threat to the orderly functioning and integrity of financial 
markets  or  the  stability  of  the  whole  or  part  of  the  financial  system  in  the  Union  or 
significantly improve the ability of competent authorities to monitor the threat; 

(b)  will not create a risk of regulatory arbitrage; 

(c)  will  not  have  a  detrimental  effect  on  the  efficiency  of  financial  markets,  including 
reducing liquidity in those markets or creating uncertainty for market participants, that is 
disproportionate to the benefits of the measure. 

Where a competent authority or competent authorities have taken a measure under Articles 16, 
17 or 18, ESMA may take any of the measures referred to in paragraph 1 without issuing the 
opinion provided for in Article 23. 

Before  deciding  to  impose  or  renew  any  measure  referred  to  in  paragraph  1,  ESMA  shall 
consult,  where  appropriate,  with  the  European  Systemic  Risk  Board  and  other  relevant 
authorities. 

Before  deciding  to  impose  or  renew  any  measure  referred  to  in  paragraph  1,  ESMA  shall 
notify competent authorities of the measure it proposes. The notification shall include details 
of  the  proposed  measures,  the  class  of  financial  instruments  and  transactions  to  which  they 
will apply, the evidence supporting those reasons and when the measures are intended to take 
effect. 

The notification shall be made not less than 24 hours before the measure is intended to take 
effect or to be renewed. In exceptional circumstances, ESMA may make the notification less 
than 24 hours before the measure is intended to take effect where it is not possible to give 24 
hours notice. 

ESMA  shall  publish  on  its  website  notice  of  any  decision  to  impose  or  renew  any  measure 
referred to in paragraph 1. The notice shall at least specify the following details: 

(a) 

(b) 

the measures imposed including the instruments and class of transactions to which they 
apply and the duration of the measures;  

the  reasons  why  ESMA  is  of  the  opinion  that  it  is  necessary  to  impose  the  measures 
including the evidence supporting the reasons. 

A measure shall take effect when the  notice  is published or at a time specified in the notice 
that is after its publication and shall only apply in relation to a transaction entered into after 
the measure takes effect. 

ESMA  shall  review  its  measures  referred  to  in  paragraph  (1)  at  appropriate  intervals  and  at 
least  every  three  months.  If  a  measure  is  not  renewed  after  that  three  month  period,  it  shall 
automatically expire. Paragraphs 2 to 8 shall apply to a renewal of measures. 

4. 

5. 

6. 

7. 

8. 

9. 

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10. 

A measure adopted by ESMA under this Article shall prevail over any previous measure taken 
by a competent authority under Section 1. 

Article 25 
Further specification of adverse events or developments 

The Commission shall adopt by means of delegated acts in accordance with Article 36 and subject to 
the conditions of Articles 37 and 38, measures specifying criteria and factors to be taken into account 
by competent authorities and ESMA in determining when the adverse events or developments referred 
to in Articles 16, 17, 18 and 23 and the threats referred to in Article 24(2)(a) arise.  

CHAPTER VI 
ROLE OF COMPETENT AUTHORITIES 

Article 26 
Competent authorities 

Each Member State shall designate a competent authority for the purpose of this Regulation. Member 
States  shall  inform  the  Commission,  ESMA  and  the  competent  authorities  of  other  Member  States 
thereof. 

Article 27 
Powers of competent authorities 

1. 

In  order  to  fulfil  their  duties  under  this  Regulation,  competent  authorities  shall  have  all  the 
supervisory  and  investigatory  powers  that  are  necessary  for  the  exercise  of  their  functions. 
They shall exercise their powers in any of the following ways: 

(a) 

directly; 

(b) 

in collaboration with other authorities;  

(c) 

by application to the competent judicial authorities. 

2. 

In order to fulfil their duties competent authorities of Member States shall have, in conformity 
with national law, the following powers: 

(a) 

have access to any document in any form and to receive or take a copy thereof; 

(b)  demand  information from  any natural or legal person and if necessary to summon and 

question a natural or legal person with a view to obtaining information; 

(c) 

carry out on-site inspections with or without announcement; 

(d) 

require existing telephone and existing data traffic records; 

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(e) 

require the cessation of any practice that is contrary to the provisions in this Regulation;  

(f) 

request the freezing and/or the sequestration of assets. 

3. 

The  competent  authorities  of  Member  States  shall,  without  limiting  paragraphs  2(a)  and  (b) 
have  the power  in  individual  cases to require a natural or legal person entering into a credit 
default swap transaction to provide all the following elements: 

(a) 

an explanation about the purpose of the transaction and whether it is for the purposes of 
hedging against a risk or otherwise;  

(b) 

information verifying the underlying risk where the transaction is for hedging purposes.  

Article 28 
Inquiries by ESMA 

ESMA  may  on  the  request  of  one  or  more  competent  authorities  or  on  its  own  initiative  conduct  an 
inquiry into a particular issue or practice relating to short selling or relating to the use of credit default 
swaps to assess whether the issue or practice poses any potential threat to financial stability or market 
confidence in the Union. 

ESMA shall publish a report setting out its findings and any recommendations relating to the issue or 
practice. 

Article 29 
Professional secrecy 

1. 

2. 

The obligation of professional secrecy shall apply to all natural or legal persons who work or 
who have worked for the competent authority or for any authority or natural or legal person to 
whom the competent authority has delegated tasks, including auditors and experts contracted 
by the competent authority. Information covered by professional secrecy may not be disclosed 
to any other natural or legal person or authority except when such disclosure is necessary for 
legal proceedings. 

All the  information exchanged between competent authorities under this Regulation shall be 
considered  confidential,  except  when  the  competent  authority  states  at  the  time  of 
communication that such information may be disclosed or when such disclosure is necessary 
for legal proceedings. 

Article 30 
Obligation to co-operate 

Competent  authorities  of  Member  States  shall  cooperate  where  it  is  necessary  or  expedient  for  the 
purposes  of  this  Regulation.  In  particular,  competent  authorities  shall,  without  undue  delay,  supply 
each other with information which is relevant for the purposes of carrying out their duties under this 
Regulation.  

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Article 31 
Cooperation in case of request for on-site inspections or investigations 

1. 

The  competent  authority  of  one  Member  State  may  request  assistance  of  the  competent 
authority of another Member State with regard to on-site inspections or investigations.  

The  competent  authority  shall  inform  ESMA  of  any  request  referred  to  in  the  first 
subparagraph.  In  case  of  an  investigation  or  an  inspection  with  cross-border  effect,  ESMA 
shall coordinate the investigation or inspection.  

2. 

Where  a  competent  authority  receives  a  request  from  a  competent  authority  of  another 
Member  State  to  carry  out  an  on-site  inspection  or  an  investigation,  it  may  do  any  of  the 
following: 

(a) 

carry out the on-site inspection or investigation itself; 

(b) 

(c) 

allow  the  competent  authority  which  submitted  the  request  to  participate  in  an  on-site 
inspection or investigation; 

allow  the  competent  authority  which  submitted  the  request  to  carry  out  the  on-site 
inspection or investigation itself; 

(d) 

appoint auditors or experts to carry out the on-site inspection or investigation;  

(e) 

share specific tasks related to supervisory activities with the other competent authorities.  

Article 32 
Cooperation with third countries 

1. 

2. 

The competent authorities shall conclude cooperation agreements with competent authorities 
of third countries concerning the exchange of information with competent authorities in third 
countries, the enforcement of obligations arising under this Regulation in third countries and 
the  taking  of  similar  measures  by  the  competent  authority  to  complement  measures  taken 
under Chapter V. 

A competent authority shall inform ESMA and other competent authorities where it proposes 
to enter into such an agreement. 

ESMA  shall  coordinate  the  development  of  cooperation  agreements  between  the  competent 
authorities of Member States and the relevant competent authorities of third countries. For that 
purpose,  ESMA  shall  prepare  a  template  agreement  that  may  be  used  by  competent 
authorities. 

ESMA  shall  also  coordinate  the  exchange  between  competent  authorities  of  information 
obtained  from  competent  authorities  of  third  countries  that  may  be  relevant  to  the  taking  of 
measures under Chapter V. 

3. 

The competent authorities shall conclude cooperation agreements on exchange of information 
with  the  competent  authorities  of  third  countries  only  where  the  information  disclosed  is 

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subject to guarantees of professional secrecy which are at least equivalent to those set out in 
Article 29. Such exchange of information must be intended for the performance of the tasks of 
those competent authorities. 

Article 33 
Transfer and retention of personal data 

With regard to transfer of personal data between Member States or Member States and a third country, 
Member States shall apply Directive 95/46/EC. With regard to transfer of personal data by ESMA to 
Member States or to a third country, ESMA shall comply with Regulation (EC) No 45/2001. 

Data shall be retained for a maximum period of 5 years. 

Article 34 
Disclosure of information to third countries 

The competent authority of a Member State may transfer to a third country data and the analysis of data 
when  the  conditions  laid  down  in Article  25  or  26  of  Directive  95/46/EC  are  fulfilled  and  only  on  a 
case-by-case basis. The competent authority of the Member State shall be satisfied that the transfer is 
necessary  for  the  purpose  of  this  Regulation.  The  third  country  shall  not  transfer  the  data  to  another 
third country without the express written authorisation of competent authority of the Member State. 

The competent authority of a Member State shall only disclose information received from a competent 
authority  of  another  Member  State  to  a  competent  authority  of  a  third  country  where  the  competent 
authority  of  the  Member  State  concerned  has  obtained  express  agreement  of  the  competent  authority 
which  transmitted  the  information  and,  where  applicable,  the  information  is  disclosed  solely  for  the 
purposes for which that competent authority gave its agreement. 

Article 35 
Penalties 

Member  States  shall  establish  rules  on  administrative  measures,  sanctions  and  pecuniary  penalties 
applicable to infringements of the provisions of this Regulation and shall take all measures necessary to 
ensure  that  they  are  implemented.  The  measures,  sanctions  and  penalties  provided  for  must  be 
effective, proportionate and dissuasive. 

Member States shall notify those provisions to the Commission by [1 July 2012] at the latest and shall 
notify it without delay of any subsequent amendment affecting them. 

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CHAPTER VII 
DELEGATED ACTS 

Article 36 
Exercise of the delegation 

1. 

2. 

3. 

1. 

2. 

3. 

1. 

2. 

The  powers  to  adopt  delegated  acts  referred  to  in  Articles  2(2),  3(7),  4(2),  5(3),  7(3),  8(3), 
9(5),  14(3),  19(4),  19(5)  and  25  shall  be  conferred  on  the  Commission  for  an  indeterminate 
period of time.  

As  soon  as  it  adopts  a  delegated  act,  the  Commission  shall  notify  it  simultaneously  to  the 
European Parliament and to the Council.  

The powers to adopt delegated acts are conferred on the Commission subject to the conditions 
laid down in Articles 38 and 39. 

Article 37 
Revocation of the delegation 

The delegation of powers referred to in Articles 2(2), 3(7), 4(2), 5(3), 7(3), 8(3), 9(5), 14(3), 
19(4), 19(5) and 25 may be revoked at any time by the European Parliament or by the Council.  

The  institution  which  has  commenced  an  internal  procedure  for  deciding  whether  to  revoke 
the delegation of powers shall endeavour to inform the other institution and the Commission 
within  a  reasonable  time  before  the  final  decision  is  taken,  indicating  the  delegated  powers 
which could be subject to revocation and possible reasons for a revocation. 

The decision of revocation shall put an end to the delegation of the powers specified in that 
decision. It shall take effect immediately or at a later date specified therein. It shall not affect 
the validity of the delegated acts already in force. It shall be published in the Official Journal 
of the European Union. 

Article 38 
Objections to delegated acts 

The European Parliament and the Council may object to a delegated act within a period of two 
months from the date of notification. 

At  the  initiative  of  the  European  Parliament  or  the  Council  this  period  shall  be  extended  by 
one month. 

If, on expiry of that period, neither the European Parliament nor the Council has objected to 
the delegated act it shall be published in the Official Journal of the European Union and shall 
enter into force at the date stated therein. 

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3. 

1. 

2. 

3. 

The delegated act may be published in the Official Journal of the European Union and enter 
into  force  before  the  expiry  of  that  period  where  the  European  Parliament  and  the  Council 
have both informed the Commission of their intention not to raise objections. 

Where the European Parliament or the Council objects to a delegated act, it shall not enter into 
force. The institution which objects shall state the reasons for objecting to the delegated act. 

Article 39 
Committee procedure 

The  Commission  shall  be  assisted  by  the  European  Securities  Committee  established  by 
Commission Decision 2001/528/EC23. 

Where reference is made to this paragraph, Article 5 and Article 7 of Decision 1999/468/EC 
shall apply, having regard to the provisions of Article 8 thereof. 

The period laid down in Article 5(6) of Decision 1999/468/EC shall be set at three months. 

CHAPTER VIII 
TRANSITIONAL AND FINAL PROVISIONS 

Article 40 
Review and report 

By  30  June  2014,  the  Commission  shall,  in  light  of  discussions  with  the  competent  authorities  and 
ESMA, report to the Council and the European Parliament on: 

(a) 

(b) 

(c) 

the appropriateness of the reporting and public disclosure thresholds under Articles 5, 7 and 8; 

the operation of the restrictions and requirements in Chapter II;  

whether  any  other  restrictions  or  conditions  on  short  selling  or  credit  default  swaps  are 
appropriate. 

Article 41 
Transitional provision  

Existing measures falling within the scope of this Regulation, in force before 15 September 2010, may 
remain applicable until [1 July 2013] provided that they are notified to the Commission.  

23 

OJ L 191, 13.7.2001, p.45. 

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Article 42 
Entry into force  

This Regulation shall enter into force on the day following that of its publication in the Official Journal 
of the European Union. 

It shall apply from [1 July 2012]. 

This Regulation shall be binding in its entirety and directly applicable in all Member States. 

Done at Brussels,  

For the European Parliament 
The President 

For the Council 
The President 

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