On May 13, the European Securities and Markets Authority (ESMA) published a letter (dated April 22, 2013) from Jonathan Faull, European Commission Director General of Internal Market and Services, to Steven Maijoor, ESMA Chair. The letter relates to the regulatory technical standards which are set out in articles 4(4) and 11(14) of EMIR (the Regulation on OTC derivatives, central counterparties and trade repositories (Regulation 648/2012)). Articles 4(4) and 11(14) of EMIR deal with the application of EMIR to transactions between non-EU entities with a direct, substantial and foreseeable effect within the EU.
ESMA postponed the development of these technical standards in June, in light of discussions which were ongoing with international regulators on the coordination of the implementation of OTC derivatives market reforms. The letter requests that ESMA deliver the two draft regulatory technical standards by September 25. Letter.
On February 23, six delegated regulations containing regulatory technical standards relating to EMIR (Regulation 648/2012) were published in the Official Journal of the European Union. The regulatory technical standards provide detailed information of requirements relating to OTC derivatives, central counterparties and trade repositories in the following areas:
risk mitigation requirements; and
registration requirements for central counterparties and trade repositories.
The regulatory technical standards will enter into force on March 15, 2013, (being 20 days from their publication in the Official Journal) and trigger the effective date of several key EMIR obligations, such as the requirement for financial and non-financial entities to confirm their non-centrally-cleared OTC derivative transactions on a timely basis.
ESMA has not yet released draft technical standards relating to the margin and capital requirements for non-centrally cleared trades.
On January 30, the European Securities and Markets Association (ESMA) published the second update to its questions and answers on the implementation of the Short Selling Regulation (the SSR). The Q&A document addressed questions posed by the general public, market participants and competent authorities with the aim of ensuring that competent supervisory authorities adopt common supervisory approaches and practices in the application of the European short selling regulatory regime. The Q&A document has been updated in respect of ESMA’s guidance on:
Question 1 – The scope of the SSR.
Question 3 – Calculating the net short position.
Question 4 – Duration adjustment for calculating net short positions in sovereign debt.
Question 5 – Net short positions when different entities in a group have long or short positions or for fund management activities.
Question 7 – Uncovered short sales.
In addition ESMA has added a new question 8 on uncovered sovereign credit default swaps.
On December 10, ESMA published a formal request it had received from the European Commission for technical advice on the observable effects of the Short Selling Regulation since its coming into force on November 1, 2012.
Amongst the specific questions ESMA has been asked to answer are:
1. To what extent any temporary restrictions and bans imposed by competent authorities on short selling have had any positive effects;
2. To what extent the thresholds set for notification to national regulators and public disclosure are appropriate; and
3. Whether the exemption for market makers allows for liquidity provision without undue circumvention.
The European Commission is obliged to report on the issues above to the European Parliament and the Council by June 30, 2013. It has asked ESMA to deliver its technical advice by May 31, 2013. Market participants can expect ESMA to launch a consultation shortly, with a deadline for responses sometime in the spring of 2013.
On November 1, the Short Selling Regulation (SSR) came into force across the European Union. The SSR applies to the short selling of shares, sovereign debt, sovereign credit default swaps and related instruments that are admitted to trading or traded on an European Economic Area trading venue (unless they are primarily traded on a third country venue). The SSR:
requires holders of these net short positions to make notifications once certain thresholds have been breached;
outlines restrictions on investors entering into uncovered short positions; and
gives powers to regulating authorities to suspend short selling or limit transactions when the price of various instruments fall by set percentage amounts from the previous day’s closing price.
In line with the coming into force of the SSR, the FSA has published policy statement 12/19 which sets out the resulting changes to the FSA’s Handbook. These changes also came into force on November 1.
The SSR does allow for limited exemptions for certain market making activities in respect of transparency requirements and the restrictions on uncovered short sales. ESMA has consulted on its proposed guidelines in respect of these limited exemptions, and plans to publish its final guidelines by the end of November.
On September 27 ESMA published its final draft regulatory technical standards (RTS) which detail how the requirements of EMIR are to be implemented. The draft RTS have been developed through a consultation process which began in February 2012 with the publication of ESMA’s discussion paper and continued in June 2012 with the publication of ESMA’s consultation paper. The final draft RTS incorporate several changes to the initial version, and set out:
the details of derivative transactions that need to be reported to trade repositories, including confirming that:
that the reporting of collateral can be done on a portfolio basis;
the reporting of mark to market values is only applicable to those counterparties under the obligation to calculate those on a daily basis;
clarification on how clearing thresholds will operate, including that employee’s benefits and acquisitions would be covered by the hedging definition;
the risk mitigation techniques for OTC derivatives that are not centrally cleared (including timely confirmation, portfolio compression and reconciliation); and
a set of organisational, conduct of business and prudential requirements for CCPs to ensure sound and resilient counterparties.
The final draft RTS have been submitted to the European Commission who have until December 31 to decide whether to endorse them. The RTS, once endorsed, will be directly applicable across the European Union.
ESMA has published a consultation paper on its draft guidelines in relation to the exemption for market making activities and primary dealer operations under the Regulation on short selling and certain aspects of Credit Default Swaps (the “Regulation”). Certain market making activities (as defined under Article 2.1 of the Regulation) enjoy exemptions (under Article 17 of the Regulation) from net short position transparency requirements and the restrictions on uncovered short sales. ESMA is consulting on the scope and definition of market making activities and how the exemption of such activities should be applied in practice.
ESMA’s consultation includes questions on:
the definition and scope of the exemption for market making activities;
determination of the competent authority that should be notified;
the general principles applicable to persons intending to make use of the exemption; and
the qualifying criteria of eligibility for the exemption.
ESMA invites responses to its consultation paper by October 5.
On August 29, the European Systemic Risk Board (ESRB) published advice to the European Securities and Markets Authority (ESMA) on the following two aspects of the draft regulatory technical standards (RTS) to be implemented pursuant to EMIR. Advice 1. Advice 2.
Use of over-the-counter (OTC) derivatives by non-financial counterparties
Legislators may wish to ensure that all corporations exposed to derivative activities at a given proportion of their overall balance sheet are treated equally, whatever their size.
The total amount of derivatives held by a non-financial corporation, irrespective of their intended use, should be appropriately reflected in the calculation of the clearing threshold.
Eligibility of collateral for central counterparties (CCPs)
Type of collateral used – CCPs should only accept securities that are listed and publicly traded.
The haircuts to apply to collateral – haircut practices should be designed in a way that minimises sudden and large increases in times of market stress.
Conditions under which commercial bank guarantees may be accepted as collateral – commercial bank guarantees should be subject to a limited use and lower concentration ratio than the one applicable to other eligible collateral.
On July 23, ESMA announced that an open hearing will take place on the draft Guidelines on sound remuneration policies under the Alternative Investment Fund Managers Directive (“AIFMD”). The draft Guidelines form the consultation process and were published on June 28. The hearing will cover the scope of the proposed Guidelines. Agenda.
The hearing will take place at ESMA’s offices in Paris on September 25 and is open to all members of the public.
On July 23, Spain, Italy and Greece introduced new temporary bans in relation to short selling in response to the recent extreme volatility in the European financial markets.
The Comisiòn Nacional del Mercado de Valores (“CNMV”) has decided to ban short selling on Spanish regulated markets with immediate effect. The ban will apply for three months until October 23, although CNMV may choose to extend it for a further period.
The Commissione Nazionale per le Società e la Borsa (“CONSOB”) announced a ban on short selling in respect of shares of certain companies in the Italian banking and insurance sectors that will last from July 23 to July 27.
In addition, on July 24, Greece’s Hellenic Capital Market Commission (“HCMC”) announced an extension to the current short selling prohibition on the Athens Stock Exchange for an additional three months until October 31. Press Release.
For further details, please see updated version of the European Securities and Markets Authority (“ESMA”)’s table of members’ short selling measures. Updated Version.
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