11 July 2017
Reporter: Drew Nicol

ESMA calls for industry comment on short selling rules

The European Securities and Markets Authority (ESMA) has been tasked with collecting market comment to form the basis of its its future technical advice to the European Commission on the Short Selling Regulation (SSR).

Ahead of the consultation, which will run until 4 September, ESMA published a new whitepaper that addresses the exemption in short selling regulations for market making activities and covers the short term restrictions on short selling in case of a significant decline in prices under Article 23 of the SSR.

The final section also elaborates on the transparency of net short positions and related reporting and disclosure requirements.

ESMA will publish its final technical advice on the SSR for the European Commission by 31 December.

The SSR provides that the requirements concerning notification or disclosure of significant net short positions in shares and sovereign debt, and the restrictions on uncovered short sales in shares or sovereign debt, or on uncovered sovereign credit default swaps (CDS), do not apply to transactions performed in the course of market making activities.

Article 17 of the SSR offers an exemption for market makers and primary dealers, allowing them to build net short positions without being obliged to notify to the relevant competent authority and to the public and to enter into short sales without having a coverage for the short sale.

Market makers can also enter into transactions that lead to uncovered position on a sovereign CDS.

The rationale for the exemption, according to ESMA, is that these activities play a crucial role in providing liquidity to markets within the EU and they need to take net short positions to perform their role.

A key part of the consultation relates to the need to align the definitions of ‘market marker’ in the SSR and the fast-approaching second iteration of the Markets in Financial Instruments Directive (MiFID II).

Specifically, ESMA must reconcile the “relevant differences” between the two rules frameworks, including the fact that the MiFID II definition does not make reference to any trading venue membership requirement as under SSR.

It also does not incorporate the three capacities specified in Article 2(1)(k) of the SSR, specifying the activities that could benefit from the exemption, such as posting of firm, simultaneous two-way quotes of comparable size and at competitive prices, with the result of providing liquidity on a regular and ongoing basis to the market.

Further information is needed on the definition of the client’s facilitation capacity, or the hedging positions arising from the fulfilment of the two above tasks.

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