Brief about the ban on uncovered short sales

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Several newspapers today write about Nordnet, which has received an infringement fee of 100 million Swedish kroner. The reason for the fee is that Nordnet offered a product that involved a risk of uncovered short selling, “naked short”.

Short selling is the sale of a share/bond that you do not own at the time of entering into the agreement. The purpose is a belief that the share will fall in value and the opportunity to buy back the share cheaper, with subsequent profit. Selling securities that one does not have naturally entails a risk that the seller cannot fulfill when the time has come to deliver.

In 1997, therefore, a statutory requirement was introduced for cover in the case of short sales – i.e. a requirement to ensure that one would have access to the security at settlement time. However, the requirement only applied to Norwegian securities companies and not to investors who, for example, traded on their own or through foreign brokers.

During the financial crisis in 2008, several countries introduced temporary bans on short selling in an attempt to avoid further unrest and price declines. In Norway, this led to the then Kredittilsynet placing a temporary ban on short selling of shares, both covered and uncovered. The temporary ban lasted just under a year. Following this, in July 2010, a general ban on uncovered short sales was legislated.

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