EUROPE: ESMA publishes mandate from EU Commission on evaluation of EU Short Selling Regulation

Tuesday December 11 2012

The European Securities and Markets Authority has published the formal request received from the Commission for technical advice on the evaluation of the EU Short Selling Regulation, which entered into force on 1st November 2012.

Commission reporting

The Commission is under the obligation to report to the European Parliament and the Council by 30 June 2013 on the following issues:

• the appropriateness of the notification and disclosure thresholds;
• the impact of the individual disclosure requirements of significant net short positions in shares, in particular with regard to the efficiency and volatility of financial markets;
• the appropriateness of direct, centralised reporting to ESMA;
• the operation of the restrictions and requirements, notably the notification and reporting requirements, the ban on naked short selling of shares and government bonds, the ban on naked CDS, and the provisions regarding buy-in procedures;
• the appropriateness of the restrictions on the uncovered sovereign credit default swaps and the appropriateness of any other restrictions or conditions on short selling or credit default swaps.

The Regulation requires the Commission to discuss these issues with the competent authorities and ESMA, before reporting to the European Parliament and the Council.

ESMA`s technical advice

To assist the Commission in framing its report to the Parliament and Council on the functioning of the Short Selling Regulation, ESMA is invited to provide technical advice on the following issues:

• Whether and to what extent the beneficial effects of short selling for volatility and price formation during normal times have been impacted by reporting and publication requirements or restrictions on uncovered short selling,
• to what extent any temporary restrictions imposed by competent authorities on short selling have had any positive effects in terms of reducing price falls, or any negative effects on volatility and price formation,
• to what extent the thresholds set for notification are appropriate for competent authorities’ supervisory purposes and the thresholds for public disclosure are appropriate for the market`s needs,
• whether the thresholds set to identify a significant drop in the price of financial instruments are appropriate for all instruments, and whether (and if so how) thresholds should be set for significant price falls in UCITS and commodity derivatives,
• whether and to what extent the ban on naked sovereign CDS has had any effects in terms of market prices and of volatility of sovereign debt markets or investment by affecting the scope for hedging.

The assessment will require evaluation of statistics and, where possible, comparison of data before and after entry into application of the Regulation on 1st November 2012. More specifically, the statistical analysis would include:

• An analysis of published short positions since the regime has entered into force;
• An analysis of volatility and price formation for shares and bonds, including spreads and news transmission, related to the size of published short positions;
• An analysis of the impact on securities lending behaviour provided that data are available;
• An analysis of the impact on settlement discipline;
• An analysis of the impact of short selling bans adopted under the new regulation, if any;
• An analysis of the impact of the lifting of short selling restrictions adopted under the new regulation, if any.

ESMA`s market survey

ESMA is expected to conduct a survey of market participants and competent authorities in order to answer the following questions:

• whether reported information is sufficient for competent authorities to perform their functions, including monitoring and supervision of systemic risk, market stability and market abuse,
• whether published information is sufficient for market participants to better understand market dynamics,
• whether and to what extent the Regulation has affected non-financial actors, notably their need to hedge,
• whether there are possibilities for circumvention, notably through third countries,
• whether the exemption for market makers allows for liquidity provision without undue circumvention,
• whether the thresholds set to identify a significant drop in the price of financial instruments are appropriate for all instruments, and whether (and if so how) thresholds should be set for significant price falls in UCITS and commodity derivatives,
• whether reporting mechanisms are operating efficiently.

Timeframes

The Commission is under the obligation to report to the European Parliament and the Council by 30 June 2013. The deadline set to ESMA to deliver the technical advice is 31 May 2013.

Click on the above link for more details.