Different types of short selling

The following Financial Services practice note provides comprehensive and up to date legal information covering:

  • Different types of short selling
  • Short selling: the two key types
  • Covered short selling
  • Uncovered (naked) short selling
  • Naked short selling: settlement risk
  • EU and UK restrictions on short selling

Different types of short selling

Short selling: the two key types

Regulation (EU) 236/2012 (OJ L 86/1) (the EU Short Selling Regulation) came into force on 25 March 2012 and applies from 1 November 2012.

As of IP completion day (31 December 2020), the onshored Short Selling Regulation, Retained Regulation (EU) 236/2012 (the UK Short Selling Regulation), applies in the UK.

The EU Short Selling Regulation and the UK Short Selling Regulation include a definition of short selling in Article 2.

Generally, short selling is understood to mean a technique whereby a trader arranges to sell a security that he does not own. The trader aims to make a profit from first short selling a security and, at some point in the future, buying it back at a lower price in order to return it to the original holder.

Short selling exists in the cash equities markets and there are also derivative equivalents to short selling. For example, a short position can be taken through index futures and options and spread bets.

In summary, there are two types of short selling:

  1. covered short selling–this is a practice whereby a short seller borrows shares from a shareholder in return for a fee so that they can be delivered to a buyer at settlement. The short seller thereafter short sells the shares to a buyer. At a point in the future, the short

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