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07 July 2009
Previously, short selling was addressed only in the context of market manipulation and under the Vienna Stock Exchange (VSE) trading rules. However, in light of the global financial crisis, the government has introduced measures to mitigate the effects on the Austrian economy by providing stability to the financial market. These measures came into effect on October 26 2008.
The measures included an amendment to the Stock Exchange Act, which granted the Financial Market Authority (FMA) the power to prohibit short selling with regard to specific financial instruments for a period of up to three months. The FMA may also use this instrument to avert further risks faced by the Austrian financial market. If it is deemed that a significant risk still remains after three months, the FMA is entitled to extend the restriction for up to another six months, upon agreement by the Federal Ministry of Finance.
The VSE has also amended its existing trading rules. It can now prohibit short selling in a particular security or in all securities traded on the VSE, either as a temporary measure or until further notice. Based on this amendment, the VSE issued new trading rules prohibiting short selling in all securities traded via the Xetra trading system and the third market. This prohibition is valid from January 1 2009.
On October 27 2008 the FMA used its new power to issue a temporary prohibition on naked short selling in the spot market of shares of:
This ban was effective until November 28 2008. Only short-term naked short sale positions taken by market makers or specialists within the scope of their contractual obligations were exempt from the ban.
The FMA extended this restriction by introducing a second FMA regulation on short selling in respect of the abovementioned financial instruments until January 30 2009. By issuing this second FMA regulation, the scope of the restriction was widened to cover securities representing the abovementioned shares.
Subsequently, the FMA decided to extend the second FMA regulation. Therefore, the temporary prohibition on naked short selling regarding the abovementioned individual financial instruments, which was limited to January 31 2009, has been extended three times upon approval of the Federal Ministry of Finance. It was extended to April 30 2009 by the amendment to the second FMA regulation and then further extended to June 30 2009 by the second amendment to the second FMA regulation. On June 24 2009 the FMA announced by press release on its website yet another extension of the existing prohibition by an amendment to the second FMA regulation until September 30 2009.
Non-compliance with the second FMA regulation will result in breach of the market abuse provisions, which may result in a fine of up to €75,000. In particular circumstances non-compliance might constitute a criminal offence (eg, in certain cases of fraud). If the manipulation leads to pecuniary benefits, the FMA will declare such benefits forfeited.
Non-compliance with the VSE prohibition can result in fines under administrative law of up to €30,000. Members of the stock exchange that do not abide by the VSE's general terms and conditions will be excluded from membership. If the breach of the rules is deemed to be only temporary, membership may be suspended.
Before the introduction of these statutory short-selling measures, short selling was addressed only under the market abuse regime. On September 22 2008 the FMA published a circular on the obligation to report any suspicious transactions that may qualify as market manipulation or illegal insider trading, in particular in respect of short selling. Even though the FMA prohibition was introduced on October 27 2008, the circular remains an effective regulatory guideline on this topic.
In the circular the FMA formed the view that taking on or holding net short positions constitutes market abuse. The FMA regards a net short position of 0.25% or more of an issuer's outstanding capital as a potential indicator of market abuse.
The FMA circular also applies to over-the-counter transactions and transactions that are carried out abroad, but involve financial instruments that are admitted to trading on a regulated market in Austria or for which an application for such admission has been filed.
To our knowledge, no fines have yet been imposed for breaches of the short-selling prohibition. Clearly, the measures provide an effective way of controlling those transactions that are considered to be partly responsible for the current financial crisis. It remains to been seen for how long the prohibition will last and whether the restriction will be introduced in respect of additional financial instruments.
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