The European Securities and Markets Authority (ESMA) yesterday published draft regulatory (RTS) and implementing technical technical standards (ITS) in relation to the regulation for short selling and certain aspects of credit default swaps.
In February, the European Council introduced short-selling regulation to protect against trades that affect financial stability. The version of the regulation, largely the same as the version adopted by the European Parliament in November 2011, imposes greater transparency, increases the powers of ESMA and bans naked credit default swaps (CDS) trading (purchasing default insurance contracts without owning the related bonds), making speculation on a countrys default more difficult.
In particular, the regulation creates a two-tier model for the disclosure of significant net short positions in shares of companies listed in the EU. At a lower threshold, notification of a position must be made privately to the regulator. At a higher threshold, positions must be disclosed to the market. For sovereign debt, on the other hand, significant net short positions relating to issuers in the EU would always require private disclosure to regulators. The proposed regime also provides for notification of significant positions in CDSs that relate to EU sovereign debt issuers. The regulation effectively prohibits naked short sales by providing that at the time of the relevant short-sale transaction the market participant entering into the transaction must have either borrowed the relevant instruments, entered into an agreement to borrow them or made other appropriate locate arrangements. These restrictions do not apply where the transaction serves to hedge a pre-existing long position.
The draft RTS and ITS will be submitted to the European Commission. The Commission has three months to decide whether to endorse ESMA’s draft technical standards. A further regulatory technical standard, on the method of calculation of the fall in value of a financial instrument required under the regulation will be submitted together with the technical advice in the course of April 2012.
Separately, the European Market Infrastructure Regulation (EMIR) was yesterday approved by the European Parliament. ESMA is currently drafting technical standards for OTC derivatives, CCP and trade repositories and has released a discussion paper on EMIR (looking at less controversial areas where agreement at level 1 has already been reached) as it awaits the final text from the EU legislative process. The deadline for the technical standards is September 30.
The Depository Trust & Clearing Corporation said it welcomed the agreement on the Regulation. The company said in a statement: “This is a major milestone in Europes efforts to bring greater stability and risk mitigation to financial markets. We look forward to continuing to work collaboratively with policymakers and regulators as ESMA begins to write the detailed rules for implementing EMIR. A major issue in the months ahead will be addressing unresolved issues such as extraterritoriality and harmonisation of new regulations with and between the United States and Asia.”
The UK Investment Management Association, on the other hand, said it has concerns that ESMAs latest proposals on draft technical standards for the post-trade regulations do not properly address the issues faced by clients or the role of investment managers in the OTC derivatives markets, and might result in unnecessarily increasing costs for clients.
Jane Lowe, IMA director of Markets said: “In particular, the proposals do not fully take account of the operational readiness of clients to clear and report transactions, the cost of systems up-grades required to ensure compliance, or the dependency of many clients on agents such as fund managers to perform key functions.”
(JDC)