The European Securities and Markets Authority (ESMA) today provided some clarity as to the role of unissued shares in respect of the short selling rules under the European Short Selling Regulation (SSR). The SSR was introduced with the intention to reduce, inter alia, settlement risks and other risks linked with uncovered or naked short selling carried out by investors.
In an update to its Questions & Answers (Q&A) document regarding the implementation of the SSR, ESMA addressed the issue whether claims to as yet unissued shares like subscription rights or convertible bonds could be used to cover a short sale. Previously, the regulator had only stated that such claims may only cover a short sale if the availability of the new shares for settlement by the arrangement is ensured when settlement is due e.g. the concerned rights or convertible bonds can be converted into shares that would be available in time for ensuring the settlement. In its update, ESMA has now clarified that rights to subscribe for new shares cannot be used to cover a short sale in accordance with Article 5(1)(e) of Commission Implementing Regulation (EU) No 827/2012 where, at the time of entering into the short sale, there is uncertainty as to whether the new shares subscribed for will be available for settlement in due time. That would be the case at least where:
- taking into account that the procedure for capital increase may vary in the Member States, the successful conclusion of the capital increase is not yet known and certain as it would be where the capital increase is subject to conditions (e.g. minimum level of subscriptions);
- it is not certain that the new shares resulting from the capital increase are fungible with the existing shares sold short;
- there is uncertainty as to whether a sufficient number of new shares will be allocated to the subscriber that undertakes the short sale of the existing shares;
- the delivery of the new shares in accordance with the applicable national law in the context of the concerned capital increase cannot be effective before or on the date of settlement of the short sale of the existing shares.
The purpose of the Q&A document, which was first published in September 2012, is to promote common, uniform and consistent supervisory approaches and practices in the day-to-day application of Regulation (EU) No 236/2012 of the European Parliament and of the Council of 14 March 2012 on short selling and certain aspects of credit default swaps (“Regulation”). It has since its first publication been updated several times and ESMA will continue to do so when and where necessary.