Short Selling Reporting Rules in the EU and the US: A Greenfield Area

The following post comes from Elizabeth Howell, a doctoral student in law at the University of Oxford and a visiting scholar at Columbia Law School in the Fall Semester 2014. It is related to her paper, ‘Short Selling Reporting Rules in the EU and the US: A Greenfield Area’ that is forthcoming in the European Company Law Journal. Further details are available here http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2536523.

Short selling reporting obligations can be helpful to regulators, particularly in relation to deterring abusive behavior. Following the recent financial crisis, the European Short Selling Regulation (the ‘Regulation’)[1] introduced a common framework for short selling reporting requirements. Some of these rules can be broadly welcomed, particularly the provisions requiring private notifications of individual short positions. These reports can be valuable in providing early warning signs to regulators concerning the build up of, and who holds, a short position,[2] and such notifications can therefore help deter and constrain any particularly aggressive short selling that could be perceived to be a threat to the orderly functioning of markets.[3] However other requirements raise concerns, specifically the rules requiring public disclosure. Such issues also become evident when considering a recent evaluation conducted by the European Securities and Markets Authority (‘ESMA’).[4]

Turning to the US, it has paid far less attention to short selling reporting obligations: such provisions currently form only a small part of its regulatory framework. Further, those rules in place stem from a variety of sources and do not facilitate the efficient investigation of potential cases of market abuse by the Securities Exchange Commission (the ‘SEC’). Indeed when contrasted with the EU, no current data regularly provides the identities of short sellers to the SEC.

However the Dodd-Frank legislation set out new proposals concerning short sale reporting, including a requirement for the SEC to conduct two studies in relation to short sale positions and transaction reporting. The SEC was required to report its results to Congress by July 2011, however it missed the deadline. The report was submitted in June 2014, and concluded that none of the options were likely to be cost effective.[5] The SEC compared the proposals to a baseline of existing information, plus data that would potentially be available following the creation of a comprehensive data repository for all information concerning orders and execution for exchange-listed securities and options (the Consolidated Audit Trail (the ‘CAT’)).[6] Although this is to an extent a sensible conclusion, the CAT is still at an early stage and much will hinge on how it ultimately proceeds.

This paper examines the approach taken to short selling transparency obligations in the EU and US and discusses the recent ESMA and SEC reports. To an extent this is a somewhat technical discussion: although the EU rules are relatively clear, the current US rules are rather convoluted and fragmented in nature. Nonetheless it is also an important discussion and the paper suggests the US has lessons to learn from the EU, especially in relation to the EU’s notification regime of individual short positions. Adopting such a requirement would help assist regulators in combating possible cases of market abuse: one of the SEC’s particular concerns.[7] However the EU should also take heed of the US, especially concerning its development of the CAT. One of the biggest concerns in relation to the EU reporting obligations is the lack of harmonized implementation of the rules between the national regulators. With this in mind, the introduction of a centralized reporting system would be in keeping with the Regulation’s recitals that state the reporting obligations should be applied in a ‘uniform’ manner throughout the Union.[8]

ENDNOTES

[1] Council Regulation (EU) 236/2012 of the European Parliament and of the Council of 14 March 2012 on Short Selling and Certain Aspects of Credit Default Swaps [2012] OJ L86/1.

[2] FSA, ‘Short Selling Discussion Paper 09/1’ (2009) 29.

[3] CESR, ‘Report: Model for a Pan-European Short Selling Disclosure Regime’ (March 2010) 5-6.

[4] ESMA, ‘Technical Advice on the Evaluation of the Regulation (EU) 236/2012 of the European Parliament and of the Council on Short Selling and Certain Aspects of Credit Default Swaps’ (June 2013).

[5] SEC, ‘Short Sale Position and Transaction Reporting Report’ (5 June 2014).

[6] SEC, ‘Consolidated Audit Trail, Release No. 34-67457 (Final Rule)’ (18 July 2012) 1.

[7] See e.g. SEC, ‘Amendments to Regulation SHO, Release No. 34-61595 (Final Rule)’ (February 26, 2010) 1-2.

[8] Regulation 236/2012, recital 3.