Uncovered short sales in shares and sovereign debt

The prohibition on uncovered short sales in shares covers all "European" shares that are admitted and/or listed on regulated markets and multilateral trading facilities (MTFs) (Article 2(1) of the EU Short Selling Regulation). Shares are deemed to be "European" shares if they have their principal venue for trading within the EU. The European Securities and Markets Authority (ESMA) publishes a list of such exempted shares which are exempted from regulation on its website.

The prohibition on uncovered short sales in sovereign debt covers all sovereign debt instruments issued by an EU Member State, the Union or other sovereign issuers (Article 2(1d) of the EU Short Selling Regulation).

A short sale is allowed only if coverage exists at the time of the short sale. Article 12 in conjunction with Articles 5, 6 and 8 of Implementing Regulation (EU) No 827/2012 defines for shares how a short sale can be covered. For sovereign debt instruments, this is described in Article 13(1) of the EU Short Selling Regulation in conjunction with Articles 5, 7 and 8 of Implementing Regulation (EU) No 827/2012.

Uncovered sovereign credit default swaps

Entering into uncovered sovereign credit default swaps is prohibited (Article 14 of the EU Short Selling Regulation). A credit default swap (CDS) is covered if the collateral taker holds a long position in a debt instrument of the reference entity and by means of the CDS wishes to hedge the default risk of the sovereign issuer. The CDS is also covered if it hedges a risk of a decline in value of a sovereign debt instrument and the collateral taker holds assets or has liabilities that are correlated with the sovereign debt instrument (Article 4(1) of the EU Short Selling Regulation in conjunction with Article 14 of Delegated Regulation (EU) No 918/2012). Such correlation is measured on the basis of qualitative and quantitative criteria (Article 18 of Delegated Regulation (EU) No 918/2012).