The update comprises formal amendments such as the exact titles of the four regulations clarifying the provisions of the SSR, clarifications and further definitions, as well as completely new FAQs. The Transparency FAQs, for instance, have been worded more precisely, particularly in the sections concerning the calculation of net short positions and the special provisions that apply to groups, funds and portfolios. The section dealing with the electronic notification and publication procedure now includes questions which address frequent sources of error. In addition, BaFin has adapted some of its questions and answers to the frequently asked questions and answers of the European Securities and Markets Authority ESMA (ESMA Q&As), to whose development BaFin representatives also contributed. With its Q&As, ESMA intends to promote joint supervisory concepts and practices.

The BaFin Prohibition FAQs contain new clarifications and specifications, predominantly in the section dealing with the coverage of short sales. They now also specifically address which shares of the same issuer market participants may use to cover a short sale, how long coverage must be held and what requirements call options must fulfil in order to be able to be used as coverage. This article presents the most important changes.

Transparency FAQs

When are net short positions subject to the notification and publication requirement? This question cannot be answered by taking a brief look in the EU Short Selling Regulation, nor can it be explained in a few sentences. There are four regulations which are more concrete and which contain numerous provisions on this matter: Commission Delegated Regulation (EU) No 918/2012, Commission Implementing Regulation (EU) No 827/2012 and two sets of regulatory technical standards published as Commission Delegated Regulation (EU) No 826/2012 and Commission Delegated Regulation (EU) No 919/2012.

BaFin's Transparency FAQs answer the most important questions relating to the notification and publication requirements and point to the relevant legal provisions. The update clarifies and further explains certain provisions and it includes questions and answers regarding circumstances that are particularly prone to error.

Rounding by deletion

The answer to question 15 in the section "Scope of application & general" now explicitly states that commercial rounding is neither to be used when determining whether a net short position reaches, exceeds or falls below a threshold nor when the net short position is notified and, if applicable, published.

Only the exact, non-rounded values are decisive when it comes to assessing whether a position has reached or fallen below a threshold. The position then notified and, if required, published is the one resulting from the deletion of all decimal places beyond the first two (rounding by deletion). This is in harmony with the ESMA Q&As.

Calculation of a net short position

Questions 17a to 17c have been added to the section dealing with the calculation of a net short position and question 21, in particular, has been expanded. Answer 17a emphasises that all classes of shares have to be included in the denominator and numerator when calculating the net short position, regardless of their characteristics, e.g. ordinary shares, preference shares and savings shares. This is laid down in Article 2(1)(h) of the EU Short Selling Regulation in conjunction with Annex II, Part 1 No. 5 of Delegated Regulation (EU) No 918/2012 and is relevant where an issuer has issued shares of several classes. In such cases, rather than calculating separate net short positions, the total number of shares issued must be added up and a net short position is calculated for the entirety of issued shares.

Question and answer 35c, also a new addition to the FAQs, make clear that the International Securities Identification Number (ISIN) of the most important class of ordinary shares must be entered on the notification form. Only in cases where no ordinary shares are admitted to trading must the ISIN of the most important class of preference shares be entered. This is prescribed by Article 2(1) of the SSR in conjunction with Annex I, Table 1 of Delegated Regulation (EU) No 826/2012. As clarified in answer 17b, market participants must account for new shares from the day they are admitted to trading on a trading venue within the meaning of the SSR (Annex II, Part 1 No. 5 of Delegated Regulation (EU) No 918/2012).

Answer 21 previously explained that convertible bonds and subscription rights to shares not yet issued were to be included neither in the calculation of the short position pursuant to Article 7(b) of Delegated Regulation (EU) No 918/2012 nor in the calculation of the long position within the meaning of Article 3(2)(b) of the SSR. In order maintain consistency with the ESMA Q&As, BaFin now clarifies that bonds which relate to shares already in issue may be taken into account as a long position when calculating the net short position. However, this does not apply in cases where the holder of a convertible bond is not aware whether the convertible bond will be converted into new shares or into shares already in issue.

Entity subject to the notification and publication requirement

Delegated Regulation (EU) No 918/2012 defines more precisely the transparency requirements of Articles 5 ff. of the SSR. It makes special provisions for management entities that manage multiple funds and portfolios as well as for company groups that consist of multiple legal entities. The calculation can extend across different "levels", depending on the constellation of the net short position. The Delegated Regulation sets out different calculation methods for funds and portfolios on the one hand and for groups on the other. A third-party (legal) entity may also be subject to the notification and/or publication requirement.

BaFin has defined questions 24 to 32 more clearly and included cross-references between the individual questions to give a more user-friendly overview of the topic. In adding question 24a to the FAQs, BaFin has included the definition of the management entity of a fund or portfolio of Article 12(2)(c) of Delegated Regulation (EU) No 918/2012. This management entity is key in determining who is subject to the notification requirement.

Electronic notification and publication procedure

The section on the electronic notification and publication procedure has been expanded to include questions and notes describing frequent sources of error. Question 33, for instance, emphasises that in Germany net short positions must be notified to BaFin and that, in addition, the person subject to the publication requirement must publish the net short position in the German Federal Gazette (Bundesanzeiger) if it reaches or falls below certain thresholds.

BaFin has also added questions that relate to the electronic notification procedure and which are frequently asked by those subject to the notification requirement. The FAQs thus supplement the User Manual for BaFin's Reporting and Publishing Platform (Melde- und Veröffentlichungsplattform - MVP-Portal) which includes detailed instructions on the electronic notification procedure. Answer 34a makes users aware of the possibility of familiarising themselves with the MVP Portal by applying for the "test: specialised procedure for net short positions".

A frequent error is dealt with in answer 35a: Despite the fact that section 4 (3) no. 2 of the German Regulation on Net Short Positions (Netto-Leerverkaufspositionsverordnung - NLPosV) prescribes that the company address must be listed, contact persons often give their private address when registering for the MVP Portal. Answer 35b details what must be done by the person or entity subject to the notification requirement or by the third party appointed to satisfy the notification requirement in case of a change of address or of the company name. Answer 44a explains that the status of a notification can be tracked in the MVP Portal under "View journal" and that errors can be identified by their error codes. As set out in answer 44b, multiple net short positions can only be submitted at intervals of at least ten minutes because the MVP Portal runs plausibility checks. This is relevant in cases where a number of late notifications must be submitted, for example.

Prohibition FAQs

Time and again, questions arise relating to coverage in the context of the ban on short selling of shares and sovereign debt. Against this backdrop, the Prohibition FAQs have been made more precise, especially in the section dealing with the coverage of short sales.

The SSR restricts short selling by stipulating that short sales shall be covered at all times. This is based on the notion of settlement which is expressed in the prohibiting provisions of the SSR and also articulated in recital 18: "Uncovered short selling of shares and sovereign debt is sometimes viewed as increasing the potential risk of settlement failure [...]. To reduce such risks it is appropriate to place proportionate restrictions on uncovered short selling of such instruments."

Share class under capital market law

Answer 10a, a new addition to the FAQs, states that not all shares of the same issuer can be used to cover a short sale. Rather, all forms of coverage within the meaning of Article 12(1) and, where applicable, (2) of the SSR in conjunction with the different types of agreement under Article 5(1) or Article 6 of Delegated Regulation (EU) No 827/2012 must entail shares belonging to the same class under capital market law. Shares belong to the same class under capital market law if they are structured identically, i.e. if they have the same ISIN. In principle, a short sale can therefore only be covered by shares which have the same ISIN. If this is not the case, the transaction is an uncovered short sale and thus constitutes a contravention of the SSR.

This follows the spirit and purpose of the provisions for coverage as well as the notion of settlement of the SSR. Coverage of a short sale is intended to enable the transaction to be settled in due time. In order to ensure that this is the case, shares must be substitutable and interchangeable, i.e. they must be fungible. It is in the interest of the purchaser to receive precisely those shares which were purchased - not (merely) shares of the same issuer which may carry different rights and obligations.

If the definition of class under stock corporation law was to be applied in this context, this would lead to too wide a range of possibilities for coverage. A short sale of registered shares could, for instance, be covered by bearer shares and vice versa. Similarly, if new shares carrying a different dividend entitlement were to be used to cover the short sale of existing shares, the outcome would not be in line with the intention of the SSR. The shares which the purchaser would receive would not be structured in the same way as the ones which were purchased. After all, there is usually a difference in price between new and existing shares since the price of new shares is lower as a matter of principle. The more narrow definition of class under capital market law is therefore appropriate.

Continued coverage

Answer 10b now states that coverage of a short sale must, as a matter of principle, exist up until settlement of the short sale. During this period, coverage may, however, be substituted any number of times. A person selling short a security or sovereign debt who does not uphold coverage after entering into a short sale agreement or who does not substitute it with another suitable form of coverage is therefore violating Article 12(1) and Article 13(1) of the SSR, as is a person who does not hold coverage when entering into a short sale. As mentioned above, the requirement of continued coverage is based on the notion of settlement of the SSR which is expressed not only in the recitals but also in Article 12 and Article 13 of the SSR as well as in Article 5(1) and Article 6 of Implementing Regulation (EU) No 827/2012.

The prohibitions of Article 12(1)(b) and Article 13(1)(b) of the SSR provide that where coverage has not yet been delivered to the short seller, for instance if borrowed shares have not been delivered yet, this coverage must be established in such a way that settlement of the short sale can be effected when it is due. Article 5(1) of Implementing Regulation (EU) No 827/2012 provides that, if used as coverage, agreements to borrow or other enforceable claims having similar effect must also be held for the duration of the short sale.

The provisions on same-day locate arrangements of Article 6(3) of Implementing Regulation (EU) No 827/2012 are equally clear. Such arrangements provide coverage to the short seller on the day on which the short sale takes place. In order to obtain coverage, however, the seller must confirm that to substitute for the arrangement, another form of coverage will be obtained by purchasing securities on the same day. Furthermore, the short seller must confirm that the contracting party to the locate arrangement will be instructed promptly to procure the shares to cover the short sale and to ensure settlement of the short sale in due time, if the short seller is unable to cover the short sale on the same day with his own purchases. This, too, underlines the fact that coverage is not merely a formality for the moment of the short sale but rather that coverage must exist up until settlement of the short sale.

Coverage with call options

Answer 12b is also a new addition to the FAQs. It clarifies that a short sale may only be covered by a derivative counter-position in the form of an American call option with physical settlement if the option is exercised in time for the underlying to be transferred in such timely manner that the obligation under the short sale can be settled in due time. This means that a trading participant who sells short a share that falls under the SSR, having previously purchased or purchasing at the same time an American call option as coverage, must exercise the option in such timely manner that the underlying share can be delivered in due time for the settlement date under the short sale. Otherwise, this is an uncovered short sale and thus constitutes a contravention of the SSR. This provision also incorporates the notion of settlement of the SSR.