• Professional News
  • 07 December 2011

The scope of the Danish ban on short selling

Derivative financial instruments – such as indexes – where Danish bank shares make up less than 25% and a single share makes up no more than 15% are not covered by the ban on short selling.

On the basis of a request by Nasdaq OMX and the Danish Securities Dealers Association, the Danish Financial Supervisory Authority (FSA) published its interpretation of the scope of the ban on short selling on 2 December 2011. The FSA finds that derivative financial instruments, such as the OMXC20 index, where Danish bank shares make up less than 25% and a single bank share makes up no more than 15%, are not covered by the ban on short selling as the impact of the underlying asset is deemed to be insignificant.

In connection with the FSA’s consideration of this issue, Nasdaq OMX stated that derivative financial instruments based on the OMXC20 index cannot be used for the purpose of driving down share prices. Nasdaq OMX has presented examples of the application of OMXC20 futures as an instrument to obtain a short position in Danish bank shares.

The OMXC20 index portfolio consists of the 20 most traded Danish shares, including Danske Bank shares and Sydbank shares. The bank shares currently weigh approx. 13% in the index.

It appears from the FSA’s published interpretation that Nasdaq OMX has informed the FSA that investors use futures and options based on the OMXC20 index for hedging purposes (exempt from the ban) as well as for trading based on general expectations of developments in the Danish share market and not a single share. Hence, Nasdaq OMX deems it unrealistic to use the index for the sole purpose of shorting bank shares as the costs as well as the risks involved would prove too high considering that the outcome would also depend on the price developments in the 18 other shares. In support of this view, Nasdaq OMX has made several calculations of various developments in the OMXC20 index based on historical trading data. The FSA agrees.

Relevant decisions on short selling
On 15 August, an investor was reported to the police by the FSA for allegedly violating the ban on short selling and for manipulating share prices in connection with selling bank shares not owned by the investor in question.

EU regulation on short selling in the pipeline
In September 2010, the Commission made a proposal for a regulation on short selling. The FSA has announced that the EU reached an informal political agreement in October 2011 on the regulation with an expected commencement date on 1 November 2013. The regulation lays down provisions on the duty of disclosure in connection with shares to be notified to authorities in the event that short positions equal more than 0.2% of the company’s share capital. Where short positions equal more than 0.5% of the share capital, public disclosure must be made. In both instances, notification or disclosure must be made each time the position is increased by 0.1%. The duty of disclosure also extends to short positions in sovereign debt bonds as well as short positions in credit default swaps in treasury certificates.

In addition to the duty of disclosure in connection with the above financial instruments, a ban against uncovered short positions in shares (i.e. not only bank shares), sovereign debt bonds and credit default swaps in treasury certificates will also be enacted.

(The FSA’s interpretation of 14 November)
Section 39b of the Danish Securities Trading Act (lov om værdipapirhandel), section 2 of Executive Order on short selling (bekendtgørelse om short selling).

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