EUROPE: ESMA publishes technical advice on review of EU Short Selling Regulation

Tuesday June 4 2013

The European Securities and Markets Authority has published its Technical Advice evaluating the impact of the EU Short Selling Regulation on European financial markets.

The technical advice has been prepared in response to a European Commission request for Technical Advice to inform its report to the European Parliament and Council on the impact of the Regulation, which is due by end of June 2013.

The report makes a number of recommendations that would help to improve how the Regulation works in practice, with the overall recommendation that the regime be re-assessed at a future date when more data and experience have been accumulated.

Scope of ESMA`s review
ESMA was asked to report on the observable effects of the Regulation and carried out an analysis on:

• the market impact of the transparency requirements, restrictions on uncovered short selling and uncovered sovereign CDS and of any temporary measures restricting short selling; and
• whether the current provisions of the Regulation and their application are fulfilling the needs of market participants in terms of transparency and the needs of the regulators to perform their supervisory functions.

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. 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`s key findings were that:

• there were mixed effects on liquidity of EU stocks, with a slight decline in volatility, a decrease in bid-ask spreads and no significant impact on traded volumes. Price discovery speed seemed to have decreased compared to the period before the entry into force of the Regulation;
• overall, settlement discipline had improved; and
• no compelling impact on the liquidity of EU single name CDS and on the related sovereign bonds markets could be noticed (except in a few countries). The liquidity in European sovereign CDS indices had however been somewhat reduced.

ESMA`s recommendations

The technical advice key recommendations are as follows:

Transparency and reporting requirements

• The current reporting and disclosure thresholds are considered appropriate and ESMA only suggests considering some technical improvements in the method for calculating net short positions in shares (technical improvements in the method for calculating net short positions to facilitate the access by investors to information on indices and on issued share capital; and in the information provided to the competent authorities and to the public through the notifications in the case of actively managed funds and on positions held through convertible bonds or subscription rights) and
• the method of calculation of net short positions in sovereign debt, particularly the duration-adjusted approach, should be revisited, and the thresholds for notifications should be reviewed, given the very low number of notifications received

Restrictions on uncovered short sales in shares and sovereign debt

• Some adjustments to the regime should be considered to allow internal locate arrangements within the same legal entity (provided that appropriate separations between internal trading and lending desks are put in place);
• the definition of “liquid shares” for the purpose of locate arrangements should be revisited at a later stage.