Short selling: the most recent international rules

What is short selling?

Short selling is a financial operation for the disposal of securities not directly possessed by the seller. In general, this term refers to all types of financial operations in which the aim is to achieve a profit following a bear trend or movement of security prices (shares, instruments, assets) on a stock exchange.

It is no coincidence that short selling is considered as a distinctly speculative operation, oriented towards short term investment. This is why before entering such a transaction, the saver should seek the assistance of professional operators.

Types of short selling

There are two types of short selling:

  1. Covered: this type of short selling is preceded by a securities loan. Therefore, anyone intending to proceed with short selling acquires securities beforehand, from an intermediary, to be able to then deliver them to the buyer.
  2. Naked: this type of short selling does not foresee any kind of coverage and is potentially a riskier operation for the buyer. Indeed after the transfer, the seller must obtain securities by purchasing them on the market or borrowing them.

International rules for short selling

Recently European regulation no. 236/2012 on short selling came into force, introducing the requirement to report significant individual net short positions above a certain threshold and establishing limits to short selling of financial instruments and the purchase of credit default swap of sovereign issuers.

This Regulation was issued to harmonise these financial operations at a European level and provide a more transparent system. Let us take a more detailed look at changes introduced by the Regulation:

  • requirement to report significant individual net short positions relating to sovereign debt of a EU country (also including other similar public issuers, such as securities issued by the European Bank for Investments, of significant amounts).
  • requirement to report significant individual net short positions relating to shares traded on a regulated stock exchange;
  • requirement to report significant individual net short positions relating to shares traded on a multilateral system of the European Union when the bear position is equal to or greater than 0.2% of issuer share capital;
  • requirement to notify the public of significant individual net short positions relating to shares when the bear position is equal to or greater than 0.5% of share capital;
  • restrictions to short selling in the absence of securities and to uncovered positions on credit default swap of sovereign issuers.
  • activities pursued by market makers or primary government bond dealers are exempt, subject to notification of competent authorities.

Italy has the following competent authorities:

  • The Bank of Italy and Consob (National Commission for Companies and the Stock Exchange) for the reception of notifications, implementation of measures and the exercise of functions and ordinary powers;
  • The Italian Ministry of Economics and Finance for powers of intervention under exceptional circumstances, to be exercised upon the proposal of the Bank of Italy, after consulting with Consob.

Obviously this new Regulation has also influenced the modus operandi of asset management companies which offer mutual investment funds  on European markets, like Tendercapital Global Bond Short Duration. (Click on the link to receive descriptive and promotion information on Tendercapital Global Bond Short Duration).