19 April 2012

ESMA advises Commission on short-selling regulation

ESMA's advice specifies the definition of when a natural or legal person is considered to own a financial instrument for the purposes of the definition of short sale. Taking into account the amount of work, complexity of the issues and the very tight deadlines, the process of preparing technical standards and drafting the advice on all delegated acts is being significantly compressed compared to normal ESMA practices. The most important differences compared to normal practice is the absence of a previous call for evidence (used normally to gather early views to help shape the legal proposals), the length of the consultation period (reduced to three weeks), and the absence of a cost benefit analysis incorporated in the consultation of the technical standards. Nevertheless, it was possible to organise a roundtable with European and international associations representing the various stakeholders at the beginning of December in order to collect views on the approach to be taken in the main technical standards and delegated acts foreseen in the Regulation. On 24 January, ESMA published a consultation paper on draft technical standards. The public consultation closed on 9 March. The interested parties also had the opportunity to provide their comments on ESMA’s proposals at an open hearing held on 29 February, 2012.

Section II of the advice relates to the net position in shares or sovereign debt covering the concept of holding a position, the case when a person has a net short position and the method of calculation of such a position, including when different entities in a group have long or short positions or for fund management activities related to separate funds.

Section III sets out the advice on the cases in which a credit default swap (CDS) transaction is considered to be hedging against a default risk or the risk of a decline of the value of the sovereign debt and the method of calculation of an uncovered position in a CDS.

Section IV defines the initial and incremental levels of the notification thresholds to apply for the reporting of net short positions in sovereign debt.

Section V specifies the parameters and methods for calculating the threshold of liquidity on sovereign debt for suspending restrictions on short sales of sovereign debt.

Section VI sets out ESMA’s proposal of advice on what constitutes a significant fall in value for various financial instruments and also specifies, in the form of a draft RTS, the method of calculation of such falls.

Section VII also specifies the criteria and factors to be taken into account by competent authorities and ESMA in determining when adverse events or developments arise.

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