Extraterritorial Application of the EU Short Selling Regulation to German Shares and Government Bonds for Third-Country Firms

The scope of application of Regulation (EU) No 236/2012 (Short Selling Regulation, SSR) is extraterritorial, meaning it applies regardless of where the person (trading firm, investment fund etc.) that sells an instrument short is located—whether within the EU/EEA or in a third country such as the USA, the UK, Canada, Singapore, or Australia. Non-compliance with SSR obligations can result in penalties or administrative sanctions.

German penalties and administrative sanctions for infringements of the SSR

Section 120(6) no. 1, (6) no. 2 , (6) no. 3, (6) no. 4, (13) in conjunction with Section 120(24) of the German Securities Trading Act (Wertpapierhandelsgesetz, WpHG) contains the following administrative sanctions in case of infringements of the SSR:

1. Intentional or reckless violations of the duty to notify BaFin due to Articles 5(1), 7(1), 8(1) each in conjunction with Article 9(1) or Article 10 will be punished by a fine up to EUR 200,000;

2. Intentional or reckless violations of the duty to disclose net short positions due to Article 6(1) each in conjunction with Article 9(1) or Article 10 will be punished by a fine up to EUR 200,000;

3. Intentional or reckless violations of the restrictions on short selling due to Articles 12(1) and 13(1) will be punished by a fine up to EUR 500,000;

4. Intentional or reckless violations of the restrictions on sovereign credit default swaps due to Article 14(1) will be punished by a fine up to EUR 500,000;

5. Intentional or reckless violations of decrees due to Article 18(2) sentence 2 and 3 and Articles 19(2), 20(2), 21(1) or 23(1) will be punished by a fine up to EUR 50,000.

Finally, according to sec. 17(4) of the German Act on Breaches of Administrative Regulations (Gesetz über Ordnungswidrigkeiten, OWiG), BaFin is empowered to absorb any profit of the offence, even if the profit exceeds the said maximum fine.

International firms should therefore have dedicated compliance and IT systems in place to be able to prove to the German supervisory authority BaFin that they have taken all reasonable measures to comply with SSR obligations.

Transparency Requirements for Net Short Positions

The Short Selling Regulation's transparency system encompasses notification and disclosure requirements for shares, sovereign debt, and sovereign credit default swaps.

Notification of net short positions relating to shares

Persons are under an obligation to notify BaFin of their net short positions relating to issued share capital of a company that has shares admitted to trading on a EU/EEA trading venue, if their holding reaches or falls below certain thresholds (Article 5 SSR).

The shares must not necessarily originate from an EU/EEA issuer. The decisive factor is that they are traded on a trading venue in the EU/EEA ("TOTV"). If the shares are TOTV, they are included in ESMA's Financial Instruments Reference Data System (FIRDS).

However, according to Article 16(1) SSR, the notification requirement does not apply to shares whose "principal venue" for trading is located in a third country. Article 2(1)(m) SSR defines the principal venue as the trading venue with the highest turnover. These venues are determined by the EU/EEA supervisory authorities and published in ESMA's register Exempted Shares under Short Selling Legal Framework.

According to Article 5(2) SSR, the relevant notification thresholds are 0.1 % of the issued share capital and each 0.1 % above that. The net positions are to be calculated in accordance with Article 3 SSR in conjunction with the Delegated Regulation (EU) 918/2012 and the ESMA Q&A.

The notification is to be made to BaFin, if the German supervisory authority is the "relevant competent authority" for that share. According to Article 2(1)(j)(v) SRR, this is the case where BaFin is the competent authority of the most relevant market in terms of liquidity for that share in the sense of Article 18 of Delegated Regulation (EU) 2017/587. If no such liquid market has been determined, BaFin is the relevant competent authority if the share was first admitted to trading on a German trading venue (Article 2(1)(j)(vi) SRR). These information can also be derived from the FIRDS database.

The net short positions are required to be notified to BaFin via its MVP Portal.

Disclosure of net short positions relating to shares

If the net short position in relation to the issued share capital of a company that has shares admitted to trading on a trading venue in the EU/EEA ("TOTV") reaches or falls below the relevant publication thresholds, the person holding that position needs to make public details of that position.

However, the exemption of Article 16 SSR also applies to the disclosure requirement, if the principal venue for trading is located in a third country (see above).

According to Article 6(2) SSR, the relevant disclosure thresholds are 0.5 % of the issued share capital and each 0.1 % above that.

The disclosure is to be made via the Bundesanzeiger, if BaFin is the "relevant competent authority" for that share (see above).

Notification of net short positions relating to sovereign debt

For net short positions in sovereign debt is a notification obligation when the respective position reaches or falls below the relevant notification thresholds (Article 7 SSR).

Sovereign debt refers to debt instruments issued by sovereign issuers (Article 2(1)(f) SSR). The types of sovereign issuers are defined in Article 2(1)(d) SSR. From a German perspective, sovereign debt includes German government bonds (issued by the Federal Republic of Germany) and German federal state bonds (issued by German federal states). It is worth noting that some German cities, namely Berlin, Bremen, and Hamburg, hold the status of federal states. Also note that some German municipalities have issued bonds (such as the City of Bochum, ISIN: DE000A2AATG1); such bonds are not sovereign debt in the sense of the Short Selling Regulation.

The relevant thresholds are determined under Article 21 of Delegated Regulation (EU) No 918/2012, updated regularly and published on ESMA's website.

The notification to BaFin has to be made via the MVP Portal.

Notification of uncovered positions in sovereign credit default swaps

Notification of uncovered positions in sovereign credit default swaps is required only if a supervisory authority suspends the restrictions on uncovered CDSs pursuant to Article 14(2) SSR (Article 8 SSR).

Porhibition of Uncovered Short Sales

The Short Selling Regulation also encompasses a ban of uncovered short sales of shares, sovereign debt and sovereign credit default swaps (CDS).

Uncovered short sales in shares

The Short Selling Regulation prohibits uncovered short sales of shares admitted to trading on an EU/EEA trading venue (Article 12(1) SSR). Short sales are only permitted if one of the legally prescribed cover methods is applied (e. g. lending or location agreements). Chapter IV of Implementing Regulation (EU) No 827/2012 and the ESMA Q&A specify the cover requirement.

However, according to Article 16(1) SSR, uncovered short sales of shares are permitted if the "principal venue" of that shares is in a third country. Article 2(1)(m) SSR defines the principal venue as the trading venue with the highest turnover. These venues are published in ESMA's register Exempted Shares under Short Selling Legal Framework.

Uncovered short sales in sovereign debt

Also with regard to sovereign debt (see above) there is a ban on uncovered short sales (Article 13(1) SSR). The cover methods are similar to those for shares and specified in Chapter IV of Implementing Regulation (EU) No 827/2012 and the ESMA Q&A.

Uncovered short sales in sovereign credit default swaps

Similarly, entering into uncovered sovereign credit default swaps (CDS) is prohibited (Article 14 SSR). A CDS is considered covered if used to hedge default risk on sovereign debt or a correlated decline in its value, as defined by Delegated Regulation (EU) No 918/2012.

Kronsteyn's Legal Services

Kronsteyn advises trading firms and fund managers on German financial market law, including securities trading law. The law firm assists its clients in navigating complex legal matters related to securities trading, providing legal opinions, communicating with BaFin, and implementing robust compliance systems. Kronsteyn also supports you with submitting notifications to BaFin or with publications at the Bundesanzeiger, if needed. For any inquiries, please contact Dr. Hendrik Müller-Lankow.