Download Ban on short selling

INTERNATIONAL BRIEFINGS
The Netherlands
Houthoff Buruma NV
Amsterdam
Ban on short selling
T
he Dutch Authority for the
Financial Markets (AFM)
announced on September 21
2008 a prohibition on short selling, as
well as a request to disclose certain short
positions to the AFM with regard to
specific financial undertakings. Initially,
only naked short selling was prohibited.
As of October 5 2008, covered short
selling also became subject to this ban.
The ban took the market by surprise.
Although regulators in the US, the UK and
Australia had taken similar measures against
short selling, in August the Dutch Minister
of Finance took a clear position against a
curb on short selling in response to
questions in parliament. Also, the AFM
had not consulted market parties before
announcing its measures, though it is under
a statutory obligation to do so. Finally, in
the financial newspapers, lawyers
questioned whether the AFM had adequate
legal powers to introduce a ban on short
selling and a disclosure obligation relating
to net short positions.
On October 11 2008, the Act on
Financial Supervision was amended. The
law now explicitly provides that the AFM
may decide that certain types of
transactions or trade orders are deemed to
fall within the scope of the prohibition on
market manipulation. The AFM’s ban on
short selling has been based on this new
provision since that date. Consequently,
violating the ban on short selling may not
only lead to enforcement measures by the
AFM: it also constitutes market
manipulation, which qualifies as a criminal
offence.
An entity that enters into a transaction or
places a trading order that, either by itself
or in combination with other transactions
or trading orders, creates or increases a net
short position falls within the scope of the
prohibition. The prohibition relates to the
following eight financial undertakings:
AEGON NV, ING Groep NV, Fortis NV,
BinckBank NV, KAS Bank NV, SNS
REAAL NV, Van der Moolen Holding NV
and Van Lanschot NV. A net short position
refers to any economic exposure through
any instrument (including contracts for
differences and options), whether direct or
indirect, to the total issued share capital of
a company. The ban on creating and
10 IFLR/December/January 2008
increasing a net short position implies that
a short position can be offset against a long
position of the same size relating to the
same company. However, issuers of
convertible bonds are not considered to be
short selling under these provisions. Overthe-counter (OTC) transactions do fall
within the scope of the prohibition,
whereas credit default swaps do not. The
AFM says that it does not impose
restrictions on stock lending activities. At
the same time, the AFM urges pension
funds and other stock lenders to alert them
if they suspect that stock is being borrowed
for the purpose of prohibited short selling.
The prohibition does not apply to
market makers. A market maker is defined
as an entity that constantly shows a
willingness in the financial markets to deal
as principal by buying or selling financial
instruments at prices it sets, both in the
OTC segment and in the regulated markets
or multilateral trade facilities, in a manner
that usually ensures that on a constant basis
liquidity is created in the markets, on the
understanding that this must apply both to
the bid and offer sides.
Every entity that has or acquires a net
short position of 0.25% is subject to an
obligation to notify this short position to
the AFM. In this respect every form of
economic interest related to the total issued
capital of one of the relevant financial
undertakings has to be taken into
consideration, again excluding an economic
interest that is held in the capacity of
market maker. Although net short positions
held at the end of the day need to be
disclosed, the short selling requirements do
not allow persons to actively increase their
net short position intra-day. Disclosure
should be made at group level and needs to
be specified at group level, provided that
the disclosure clearly states which position
belongs to which entity. Although each
legal entity is allowed to disclose on behalf
of the group, all the positions within the
group must be aggregated.
With respect to investment management,
the AFM makes a distinction between nondiscretionary management, managers with a
discretionary mandate, funds and managers
thereof. In the case of non-discretionary
management, the short selling prohibition,
as well as the disclosure obligation, applies
to the client. If the manager has a
discretionary mandate relating to segregated
accounts, the short selling prohibition
applies to the client. Where an investment
manager manages collective investment
schemes on a discretionary basis, the
prohibition applies at the fund level. Where
the fund in question is an umbrella fund
with a number of sub-funds, the
prohibition applies at the sub-fund level. In
respect of discretionary asset management
and funds, the disclosure obligation applies
both at the level of the client/fund and the
manager. The manager will have to disclose
its aggregate net short position.
The AFM has recently decided to extend
the duration of the short selling measures
until January 17 2009. It is unclear
whether the AFM will extend the duration
any further, as the AFM’s board has
publicly questioned whether the measures
help to decrease the volatility in the
markets.
Hugo Oppelaar and Jan-Willem de Jong
www.iflr.com