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ESMA published the results of a targeted review it conducted among five national competent authorities under the Short-Selling Regulation. ESMA assessed how NCAs apply the exemption for market making activities foreseen in the SSR, according to which market makers are not subject to the restrictions on uncovered short sales nor to the reporting and public disclosure obligations on significant net short positions in shares or sovereign debt. ESMA looked into whether NCAs were applying the criteria laid down by the relevant ESMA Guidelines, which requires market makers to notify exemptions to the relevant NCA on an instrument by instrument basis. The review found that:
• All NCAs have dedicated resources, processes and are staffed to handle the notifications;
• There is a significant diversity regarding the scrutiny of notifications and firms;
• NCAs are not properly seeking advance assurance of market makers’ compliance with organisational requirements to use existing exemptions;
• Some NCAs are applying a “per firm” approach to processing notifications for exemptions rather than a review of the notifications instrument by instrument as required by the Guidelines; and
• Some NCAs place an overreliance on monitoring by trading venues of market makers’ compliance with the rules and procedures of those trading venues;
ESMA has submitted its report to the European Commission for its consideration. ESMA expects the Commission to clarify what the correct interpretation of the SSR should be, and possibly to streamline the definition of market making as part of its upcoming review of the SSR, as this contributes to some of the divergent supervisory practices among NCAs.