Commission Delegated Regulation (EU) No 918/2012 of 5 July 2012 supplementing Regulation (EU) No 236/2012 of the European Parliament and of the Council on short selling and certain aspects of credit default swaps with regard to definitions, the calculation of net short positions, covered sovereign credit default swaps, notification thresholds, liquidity thresholds for suspending restrictions, significant falls in the value of financial instruments and adverse events Text with EEA relevance

CHAPTER I

GENERAL

Article 1

Subject matter

This Regulation lays down detailed rules supplementing the following Articles of Regulation (EU) No 236/2012 with regard to:

— Article 2(2) of Regulation (EU) No 236/2012 further specifying the definitions of ownership and short sale,

— Article 3(7) of Regulation (EU) No 236/2012 further specifying cases of and the method for calculating a net short position and the definition of holding,

— Article 4(2) of Regulation (EU) No 236/2012 further specifying uncovered positions in sovereign credit default swaps and the calculation methods for groups and fund management activities,

— Article 7(3) of Regulation (EU) No 236/2012 further specifying the notification threshold for significant short positions in sovereign debt,

— Article 13(4) of Regulation (EU) No 236/2012 further specifying the liquidity threshold for suspending restrictions on short sales of sovereign debt,

— Article 23(7) of Regulation (EU) No 236/2012 further specifying the meaning of significant falls in value of financial instruments other than liquid shares,

— Article 30 of Regulation (EU) No 236/2012 further specifying criteria and factors to be taken into account in determining in which cases the adverse events or developments referred to in Articles 18 to 21 and Article 27 and the threats referred to in point (a) of Article 28(2) of Regulation (EU) No 236/2012 arise.

Article 2

Definitions

For the purposes of this Regulation, the following definitions shall apply:

(a) ‘group’ means those legal entities which are controlled undertakings within the meaning of Article 2(1)(f) of Directive 2004/109/EC of the European Parliament and of the Council (⁵) and the single natural or legal person that controls such undertaking;

(b) ‘supra-national issuer’ means an issuer within the meaning of Article 2(1)(d)(i), (iv), (v) and (vi) of Regulation (EU) No 236/2012.

CHAPTER II

SUPPLEMENTARY SPECIFICATION OF DEFINITIONS PURSUANT TO ARTICLE 2(2) AND ARTICLE 3(7)(a)

Article 3

Specification of the term ‘ownership’ and defining a short sale

For the purposes of points (i), (ii) and (iii) of Article 2(1)(b) of Regulation (EU) No 236/2012, and a ‘short sale’ within the meaning of Article 2(1)(b) of Regulation (EU) No 236/2012, does not include:

(a) the sale of financial instruments that have been transferred under a securities lending or repo agreement, provided that the securities will either be returned or the transferor recalls the securities so that settlement can be effected when it is due;

(b) the sale of a financial instrument by a natural or legal person who has purchased the financial instrument prior to the sale but has not taken delivery of that financial instrument at the time of the sale provided that the financial instrument will be delivered at such time that the settlement may be effected when due;

(c) the sale of a financial instrument by a natural or legal person who has exercised an option or a similar claim on that financial instrument, provided that the financial instrument will be delivered at such a time that the settlement may be effected when due.

Article 4

Holding

A natural or legal person is considered to hold a share or debt instrument for the purposes of Article 3(2)(a) of Regulation (EU) No 236/2012 in the following circumstances:

(a) the natural or legal person owns the share or debt instrument in accordance with Article 3(1);

(b) an enforceable claim to be transferred ownership of the share or debt instrument to the natural or legal person in accordance with the law applicable to the relevant sale.

CHAPTER III

NET SHORT POSITIONS PURSUANT TO ARTICLE 3(7)(b)

Article 5

Net short positions in shares — long positions

The exposure referred to in the first subparagraph depends on the value of the share in respect of which a net short position has to be calculated, and which confers a financial advantage in the event of an increase in the price or value of the share.

Article 6

Net short positions in shares — short positions

Article 7

Net short positions in shares — general

The following criteria shall be taken into account for the purposes of net short positions referred to in Articles 5 and 6:

(a) it is irrelevant whether a cash settlement or physical delivery of underlying assets has been agreed;

(b) short positions on financial instruments that give rise to a claim to unissued shares, and subscription rights, convertible bonds and other comparable instruments shall not be considered as short positions when calculating a net short position.

Article 8

Net short position in sovereign debt — long positions

Article 9

Net short positions in sovereign debt — short positions

Article 10

Method of calculation of net short positions in relation to shares

Article 11

Calculation of net short positions for sovereign debt

CHAPTER IV

NET SHORT POSITIONS IN FUNDS OR GROUPS PURSUANT TO ARTICLE 3(7)(c)

Article 12

Method of calculating positions for management activities related to several funds or managed portfolios

For the purposes of Article 12 and Article 13, the following definitions shall apply:

(a) ‘investment strategy’ means a strategy that is pursued by a management entity, regarding a particular issuer, that aims to have either a net short or a net long position taken through transactions in various financial instruments issued by or that relate to that issuer;

(b) ‘management activities’ means management of funds irrespective of their legal form and portfolio management in accordance with mandates given by clients on a discretionary client-by-client basis where such portfolios include one or more financial instruments;

(c) ‘management entity’ means a legal person or entity, including a division, unit or department that manages, on a discretionary basis, funds or portfolios pursuant to a mandate.

When applying the method described above, the management entity shall:

(a) take into account the positions of the funds and portfolios the management of which has been delegated by a third party;

(b) exclude the positions of the funds and portfolios the management of which it has delegated to a third party.

The management entity shall report, and disclose where required, the net short position that results from paragraphs 3 and 4 when it reaches or exceeds a relevant notification or disclosure threshold in accordance with Articles 5 to 11 of Regulation (EU) No 236/2012.

Article 13

Method of calculating positions for legal entities within a group that have long or short positions in relation to a particular issuer

When a net short position reaches or crosses the notification threshold in accordance with Articles 5 and 7 or the disclosure threshold in accordance with Article 6 of Regulation (EU) No 236/2012, a legal entity within the group shall report and disclose in accordance with Articles 5 to 11 of Regulation (EU) No 236/2012 the net short position in a particular issuer calculated according to paragraph 1 provided that no net short position at group level calculated according to paragraph 2 reaches or crosses a notification or disclosure threshold. A legal entity designated for this purpose shall report, and disclose where relevant, the net short position at group level in a particular issuer calculated according to paragraph 2 when:

(i) no notification or disclosure threshold is reached or crossed by any legal entity within the group;

(ii) a notification or disclosure threshold is reached or crossed simultaneously both by the group itself and any legal entity within that group.

CHAPTER V

COVERED SOVEREIGN CREDIT DEFAULT SWAPS PURSUANT TO ARTICLE 4(2)

Article 14

Cases which are not uncovered sovereign credit default swap positions

In the following cases a sovereign credit default swap position shall not be considered an uncovered position in accordance with Article 4(1) of Regulation (EU) No 236/2012.

(a) In respect of hedges for the purpose of Article 4(1)(b) of Regulation (EU) No 236/2012, the sovereign credit default swap shall not be considered an uncovered position in accordance with Article 4(1) of Regulation (EU) No 236/2012 and shall serve to hedge against the risk of decline in the value of assets or liabilities correlated with the risk of the decline of the value of the sovereign debt which the credit default swap references and where those assets or liabilities refer to public or private sector entities in the same Member State.

(b) A sovereign credit default swap position, in which assets or liabilities refer to public or private sector entities in the same Member State as the reference sovereign for the credit default swap, shall not be considered an uncovered position in accordance with Article 4(1) of Regulation (EU) No 236/2012 where it: (i) references a Member State, including any ministry, agency or special purpose vehicle of the Member State, or in the case of a Member State that is a federal state, one of the members making up the federation; (ii) is used to hedge any assets or liabilities meeting the correlation test set out in Article 18.

(c) A sovereign credit default swap position, where the assets or liabilities refer to a sovereign issuer in which the reference sovereign for the credit default swap is a guarantor or shareholder, shall not be considered an uncovered position in accordance with Article 4(1) of Regulation (EU) No 236/2012 where it: (i) references a Member State; (ii) is used to hedge any assets or liabilities meeting the correlation test set out in Article 18.

Article 15

Cases which are not uncovered sovereign credit default swap positions where the obligor is established or the asset or liability is located in more than one Member State

Where the obligor of, or counterparty to, an asset or liability is established in more than one Member State a sovereign credit default swap position shall not be considered an uncovered position in the following cases, in accordance with Article 4(1) of Regulation (EU) No 236/2012, and provided that the correlation test in Article 18 of this Regulation is met in each case:

(a) where there is a parent company in one Member State and a subsidiary in another Member State and a loan has been made to the subsidiary. Where there is either explicit or implicit credit support to the subsidiary by the parent, it shall be permissible to purchase sovereign credit default swaps in the Member State of the parent rather than the subsidiary;

(b) where there is a parent holding company which own or controls a subsidiary operating company in a different Member States. If the parent company is the issuer of the bond but the assets and revenues that are hedged are owned by the subsidiary, it shall be permissible to buy sovereign credit default swaps referenced to the Member State of the subsidiary;

(c) to hedge an exposure to a company in one Member State which has invested in the sovereign debt of a second Member State to the extent that that company would be significantly impacted in the event of a significant fall in the value of the sovereign debt of the second Member State, provided that the company is established in both Member States. Where the correlation between this risk and the debt of the second Member State is greater than the correlation between this risk and the debt of the Member State in which the company is established it shall be permissible to buy sovereign credit default swaps referenced to the second Member State.

A sovereign credit default swap position shall not be considered an uncovered position in the following cases, in accordance with Article 4(1) of Regulation (EU) No 236/2012, and provided that the correlation test in Article 18 of this Regulation is met in each case:

(a) where the obligor of, or counterparty to, an asset or liability being hedged is a company which has operations across the Union or where the exposure being hedged relates to the Union or the Member States which have the euro as their currency, it shall be permissible to hedge it with an appropriate European or euro area index of sovereign bond credit default swaps;

(b) where the counterparty to an asset or liability being hedged is a supra-national issuer, it shall be permissible to hedge the counterparty risk with an appropriately chosen basket of sovereign credit default swaps referencing that entity’s guarantors or shareholders.

Article 16

Justification of uncovered sovereign credit default swap positions

Any natural or legal person entering into a sovereign credit default swap position shall, on the request of the competent authority:

(a) justify to that competent authority which of the cases set out in Article 15 were fulfilled at the time the position was entered into;

(b) demonstrate to that competent authority compliance with the correlation test in Article 18 and the proportionality requirements in Article 19 in respect of that sovereign credit default swap position at any time that they hold that sovereign credit default swap.

Article 17

Hedged assets and liabilities

The following are cases where assets and liabilities may be hedged through a sovereign credit default swap position, provided the conditions set out in Articles 15 and 18 and in Regulation (EU) No 236/2012 are met:

(a) a long position in the sovereign debt of the relevant issuer;

(b) any position or portfolio used in the context of hedging exposures to the sovereign issuer referenced in the credit default swaps;

(c) any assets or liabilities which refer to public sector entities in the Member State whose sovereign debt is referenced in the credit default swap. This includes exposures to central, regional and local administration, public sector entities or any exposure guaranteed by the referred entity and may include financial contracts, a portfolio of assets or financial obligations, interest rate or currency swap transactions where the sovereign credit default swap is used as a counterparty risk management tool for hedging exposure on financial or foreign trade contracts;

(d) exposures to private sector entities established in the Member State which is referenced in the sovereign credit default swap. The exposures in question include but are not limited to loans, counterparty credit risk (including potential exposure when regulatory capital is required for such exposure), receivables and guarantees. The assets and liabilities include but are not limited to financial contracts, a portfolio of assets or financial obligations, interest rate or currency swap transactions where the sovereign credit default swap is used as a counterparty risk management tool for hedging exposure on financial contracts or trade finance exposures;

(e) any indirect exposures to any of the above entities obtained through exposure to indices, funds or special purpose vehicles.

Article 18

Correlation tests

The correlation test referred to in this Chapter shall be met in either of the following cases:

(a) the quantitative correlation test shall be met by showing a Pearson’s correlation coefficient of at least 70 % between the price of the assets or liabilities and the price of the sovereign debt calculated on a historical basis using data for at least a period of 12 months of trading days immediately preceding the date when the sovereign credit default swap position is taken out;

(b) the qualitative correlation shall be met by showing meaningful correlation, which means a correlation that is based on appropriate data and is not evidence of a merely temporary dependence. The correlation shall be calculated on a historical basis using data for the 12 months of trading days before the sovereign credit default swap position is taken out, weighted to the most recent time. A different time-frame shall be used if it is demonstrated that the conditions prevailing in that period were similar to those at the time that the sovereign credit default swap position is to be taken out or which would occur in the period of the exposure being hedged. For assets for which there is not a liquid market price or where there is not a sufficiently long price history, an appropriate proxy shall be used.

The correlation test in paragraph 1 shall be deemed to have been met if it can be demonstrated that:

(a) the exposure being hedged relates to an enterprise which is owned by the sovereign issuer or where the sovereign issuer owns a majority of its voting share capital or whose debts are guaranteed by the sovereign issuer;

(b) the exposure being hedged relates to a regional, local or municipal government of the Member State;

(c) the exposure being hedged relates to an enterprise whose cash flows are significantly dependent on contracts from a sovereign issuer or a project which is funded or significantly funded or underwritten by a sovereign issuer, such as an infrastructure project.

Article 19

Proportionality

Where justified by the nature of the assets and liabilities being hedged and their relationship to the value of the obligations of the sovereign which are within the scope of the credit default swap, a greater value of sovereign credit default swap shall be held to hedge a given value of exposures. However, this shall only be permitted where it is demonstrated that a larger value of sovereign credit default swap is necessary to match a relevant measure of risk associated with the reference portfolio, taking into account as the following factors:

(a) the size of the nominal position;

(b) the sensitivity ratio of the exposures to the obligations of the sovereign which are within the scope of the credit default swap;

(c) whether the hedging strategy involved is dynamic or static.

Article 20

Method of calculation of an uncovered sovereign credit default swap position

CHAPTER VI

NOTIFICATION THRESHOLDS FOR NET SHORT POSITIONS IN SOVEREIGN DEBT PURSUANT TO ARTICLE 7(3)

Article 21

Notification thresholds for net short positions relating to the issued sovereign debt

The initial amounts and additional incremental levels for sovereign issuers shall be determined on the basis of the following factors:

(a) the thresholds shall not require notifications of net short positions of minimal value in any sovereign issuers;

(b) the total amount of outstanding sovereign debt for a sovereign issuer and average size of positions held by market participants relating to the sovereign debt of that sovereign issuer;

(c) the liquidity of the sovereign debt market of each sovereign issuer, including, where appropriate, the liquidity of the futures market for that sovereign debt.

The two initial threshold categories at the date of entry into force of this Regulation shall be:

(a) an initial threshold of 0,1 % applicable where the total amount of the outstanding issued sovereign debt is between 0 and 500 billion euro;