ESMA issued a press release yesterday with recommendations for improving the EU’s short selling regulations.
Steven Maijoor, ESMA Chair, said: “ESMA’s review has found that the introduction of the Short Selling Regulation has had some positive effects in terms of enhancing market transparency and reducing risks of settlement fails in EU financial markets.
“Due to the short period of operation of the Regulation, ESMA was subject to severe limitations in terms of available data and practical experience in supervision under the Regulation. However, ESMA is advising the European Commission to consider adjusting a number of aspects in the Regulation that do not alter its main elements.”
ESMA recommendations
The technical advice key recommendations relate to the following areas:
Transparency and reporting requirements:
o ESMA considers that the current reporting and disclosure thresholds are appropriate and only suggests considering some technical improvements in the method for calculating net short positions in shares; and
o ESMA mainly recommends to revisit the method of calculation of net short positions in sovereign debt, particularly the duration-adjusted approach, and to review the thresholds for notifications.
Restrictions on uncovered short sales in shares and sovereign debt:
o ESMA recommends considering some adjustments to the regime to allow internal
locate arrangements within the same legal entity;
o ESMA also suggests revisiting the issue of the definition of “liquid shares” for the purpose of locate arrangements at a later stage, when proper regulatory data on securities lending would be available.
Ban on uncovered sovereign CDS transactions:
o ESMA suggests that higher legal certainty could be pursued by clarifying wording in the legal text (e.g. on the correlation test) and that refinements to the detailed provisions could be envisaged:
use of sovereign CDS indices for hedging purposes;
cross-border hedging under certain liquidity and correlation circumstances; and
group hedging by a particular and dedicated entity.
Shares exempted from the Regulation on the basis of turnover calculations:
o ESMA suggests an alternative approach to draw up this list.
Regarding the exemption for market making activities, further clarifications are needed and changes to the Level 1 text may be worth considering, including:
o the scope of the exemption and the conditions for being able to make use of the exemptions, particularly the trading venue membership requirement; and
o ESMA suggests to consider a change in the instrument per instrument approach for the purpose of notifications and not to apply the 30 day period for objecting to use of the exemption to newly admitted instruments.
Emergency measures in case of a significant fall in price:
o ESMA considers that the approach for introducing such temporary bans should be reconsidered with the view to simplify the regime and ensure more consistency in their application.