EU: Short Selling Regulation exemption review completed

Tuesday January 12 2016

ESMA recently appointed an assessment group to examine the extent to which National Competent Authorities (NCA’s) apply the exemption for market making activities of the short selling regulation (SSR), and have now reported on their findings. In addition to ensuring compliance, the objective of the assessment was to identify good practices and inform future decisions on the upcoming evaluation of the SSR by the European Commission.

Exempted market makers are not subject to the restrictions on uncovered short sales or to reporting and public disclosure of significant net short positions in shares or sovereign debt.

The group focused particularly on whether NCA’s were applying the general principles and criteria of eligibility for the exemption in compliance with the ESMA guidelines, and restricted their assessment to 5 markets with the highest number of market makers benefiting from the exemption. The markets assessed are listed below:

• Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin, DE)
• Commissione Nazionale per le Società e la Borsa (Consob, IT)
• Financial Conduct Authority (FCA, UK)
• Finansinspektionen (FI, SE)
• Magyar Nemzeti Bank (MNB, HU)

Conclusions
The group concluded that of the 5 NCA’s reviewed, only Consob is compliant with the guidelines, and additionally reported the following:

• All NCA’s have dedicated resources to handle the notification of exemptions, which are staffed with capable, knowledgeable and committed staff
• A diverse range of intensity of approaches is undertaken against notifications and firms
• Market participants were presented with a diverse range of informative knowledge events relating to notification obligations.
• Best efforts on compliance have been implemented by each NCA, but the interpretation of supervision requirements vary.
• FCA, FI and BaFin acknowledged, and the Assessment Group confirmed, that they do not comply with the provisions of the ESMA Guidelines where they reported non-compliance in the ‘Guidelines compliance table’ (dated 19 June 2013 reference ESMA/2013/765);
• Different interpretations of the SSR persist resulting in different practices among NCA’s, which the group considers unsatisfactory and requests clarification following review.

• Other areas of concern:

1. NCA’s are not seeking assurance in advance that market makers intending to avail of the exemption comply with the guidelines’ organisational requirements.
2. Many NCA’s are processing notification “per firm” as opposed to instrument by instrument, required by the Guidelines.

Enforcement
The group reported that although several NCAs referred to one or more investigations that have taken place or enquiries that have been made or are being made, none of the NCAs under review have published any financial penalties or sanctions for breach of the SSR on the use of exemptions (although BaFin has indicated that it is in the process of finalising a sanctions case against one firm).

Recommendations
The group’s primary recommendations comprised the following:

• NCA’s must enhance their processes to ensure that at the time of notification, assurance can be given that the notifier meets pre-qualifying requirements of para. 43 of the guidelines (specifically organisational set-up).
• Notification must be assessed on a per instrument basis and limited to a simple assessment of the notifier.
• Ongoing monitoring of obligations and notified lists should be reviewed upon exempt entities, especially where there are no subsequent notifications.
• If NCA’s rely on trading venues for continuous monitoring of market makers, they should ensure, at a minimum, the rules for the market makers require at least the performance criteria of the guidelines.
• Information sharing should be enhanced between teams responsible for monitoring the market or looking at compliance with market abuse and the Transparency Directive.
• Difficulties of interpretation should be removed.