EUROPEAN UNION: ESMA Advises the Commission on Specific Elements of the Short Selling Regulation

Friday December 22 2017

On 21^st December 2017, the European Securities and Markets Authority (ESMA) issued its Technical Advice to the European Commission (EC) on how to improve the Short-Selling Regulation (SSR).

The SSR lays down a common regulatory framework with regard to the requirements and powers relating to short selling and credit default swaps (CDS) and ensures greater coordination and consistency between Member States. The SSR aims to enhance transparency, reduce certain risks associated with short selling and uncovered CDS, and ensure a common regulatory approach across Member States.

ESMA received a formal mandate from the European Commission on 19 January 2017 seeking Technical Advice on the evaluation of certain elements of the SSR that became applicable on 1 November 2012. The mandate required ESMA to deliver its Technical Advice by 31 July 2017. Subsequently, on 22 February 2017, further to ESMA’s request, the Commission postponed the deadline for delivery of the Technical Advice to 31 December 2017.

This Final Report is organised on four sections, a section on ESMA’s preliminary remarks and three other sections dedicated to the areas for which the Commission requested a Technical Advice from ESMA, namely the exemption for market making activities, the short term restrictions on short selling in case of a significant decline in prices under Article 23 of the SSR (“short-term bans”) and the transparency of net short positions and related reporting and disclosure requirements.

Each section summarises the relevant provisions and their objectives, identifies the main issues and concerns and explores possible ways to address them. When available, the findings of the quantitative analysis are also presented.

Annex I includes the Commission mandate to provide Technical Advice. Annex II contains the content of ESMA’s Technical Advice. Annex III contains the details of the economic analysis on the effectiveness of the short-term bans. Annex IV addresses the crossing of the thresholds set to identify a significant drop in the price falls. Annex V contains the quantitative analysis of individual net short positions.

ESMA’s Technical Advice includes proposals around the three main elements of the mandate:

Exemption for market making activities;

• ESMA proposes including the different types of on-venue market making activities described in MiFID II in the definition of ‘market-making activities’;
• ESMA considers that market makers should be members or participants of only one of the trading venues where their market-making activity takes place, not of all of them;
• ESMA proposes not requiring any membership requirement for OTC market-making activity;
• ESMA suggests introducing reporting obligations for market makers.

Short-term bans on short-selling;

• ESMA recommends that only the competent authority of the most relevant market should have the capacity to adopt a short-term ban applicable across Europe;
• ESMA proposes transforming the current bans on short selling into a ban on entering into or increasing net short positions.

Transparency of net short positions;

• ESMA suggests practical improvements of the current regime including building a centralised notification and publication system across Europe;
• ESMA supports requiring the LEI for the identification of certain position holders.

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