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The EU regulation on short selling and certain aspects of credit default swaps (CDS) came in to force on the 1 November 2012. The aim of the legislation was to provide greater transparency of short positions held by investors, reduce or eliminate settlement risks associated with uncovered or naked short positions and give member states clear powers to intervene in exceptional situations to reduce systemic and market risks.
Under the legislation, all short sales of shares and government bonds must be covered by either a borrow, or an arrangement with a third party confirming their location (i.e. naked short selling in shares is banned). The regulation also sets mandatory transparency requirements with significant net short positions being reportable to the relevant NCA. Exemptions are available for market making activities and authorised primary dealers.
What is Short Selling?
There are two types of short selling activity, covered and naked shorting. Short selling is when an investor sells a security that they do not own,
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