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Asset Management and Investment Funds Legal and Regulatory Update

AUTHOR(S): Michael Jackson, Tara Doyle
PRACTICE AREA GROUP: Asset Management and Investment Funds
DATE: 16.11.2011

Update on the Regulation of Short Selling and Credit Default Swaps

In August we reported that Belgium, France, Italy and Spain had implemented bans on short selling to take effect on 12 August 2011.  The bans introduced in France and Italy were due to expire last Friday 11 November but have been further extended by three months in France and until 15 January 2012 in the case of Italy.  Italy has also introduced a ban on naked short selling of all Italian securities.  Short selling bans introduced in Greece, Spain and Belgium remain in place.

On 15 November 2011, the European Parliament voted to adopt a regulation on short selling and credit default swaps.  The regulation sets out a harmonised framework with regard to the requirements and powers relating to short selling and credit default swaps and ensures greater consistency between member states when measures have to be taken in exceptional situations.  The original draft of the regulation contained a requirement to convert a naked short sale to a normal short sale within a single trading day.  The regulation as adopted now requires the trader to locate and have a "reasonable expectation" of being able to borrow the shares from the located party. The European Securities and Markets Authority will determine measures for judging what may be deemed a “reasonable expectation”.

The regulation also includes a ban on naked CDS trading (purchasing default insurance contracts without owning the related bonds).  A national authority will be permitted to lift the ban for a maximum of 12 months in cases where its sovereign debt market is no longer functioning properly, and then possibly renew it for a further 6 months.  However, this power would be closely circumscribed, as the text specifies a limited number of indicators which could justify the national authority’s action.  Within 24 hours of the lifting of the ban, the European Securities and Markets Authority (ESMA) would publish an opinion on its web site as to the utility of suspending the ban. A negative opinion from ESMA would have political weight.

The regulation will also introduce increased reporting requirements to national regulators and European supervisors.

The new regulation must be formally approved by the Council in the coming weeks, and it is expected that it will enter into force in November 2012.

Our previous updates on the introduction and extension of the short selling bans may be accessed here: 11 August 2011 and 29 August 2011.

Filing Schedule for UCITS Self Managed Investment Companies

In the context of timely adoption by self managed UCITS investment companies (“SMICs”) of the new UCITS IV rules on organisational matters, conflicts of interest, conduct of business and risk management, the Central Bank has indicated that it intends to issue a filing schedule for revised business plans of SMICs in the near future.  The intention is for SMICs to prepare draft documents in order to comply with the remaining UCITS IV obligations for review by the Central Bank during the course of 2012.  SMICs will not, however, be required to implement the balance of the new UCITS IV management rules until 1 July 2013.  We will issue a further update as soon as the proposed filing schedule has been set by the Central Bank.  In the event that the specific deadline allocated to your SMICs causes a particular difficulty, there may be some scope to agree an alternate filing deadline with the Central Bank. 

If there are any particular aspects of the short selling measures or the SMIC filing schedule which you would like clarification or advice on, please get in touch with your usual Asset Management and Investment Funds Group contact.



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