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Article (8/279)
Short Selling Regulation (SSR) - regulation memo
Short Selling Regulation (SSR) - regulation memo
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Short Selling Regulation (SSR) - regulation memo

10/04/2018

The Regulation (No 236/2012) on short selling and certain aspects of credit default swaps (SSR) targets the risks linked to these transactions - notably settlement risk and the risk of price spirals - and introduces a harmonised European framework to avoid regulatory arbitrage and ensure coordination between regulators

About the Short Selling Regulation

Its main objectives are to:

  • Provide tools to prevent speculation on companies and sovereign debt
  • Increase transparency on short positions held by investors in European securities
  • Reduce risks posed by naked CDS positions affecting the stability of sovereign debt markets
  • Reduce settlement risk and other risks linked with naked short selling
  • Provide Member States with legal instruments to intervene in exceptional situations, for instance by imposing temporary bans on short selling altogether
  • Ensure better coordination between Member States and ESMA in case of stress situation

The SSR was due for review in 2017. To that end, ESMA ran a public consultation in Q2 2017 and published a report and a set of recommendations to the European Commission on amendments to the Regulatory Technical Standards (L2), but not to the SSR itself.

Scope

The SSR applies to any natural or legal person who has a short position in relation to a financial instrument as defined in the scope of the regulation. The SSR covers net short positions in shares and sovereign debt, and uncovered positions in sovereign Credit Default Swaps (CDSs), with some differences related to the nature and level of risk attached to these securities.

It introduces disclosure obligations to competent authorities and/or to the market where net short positions are above certain thresholds.

The main measures to restrict net short selling are:

  • Agreements/arrangements to ensure effective settlement for shares and sovereign debt
  • Ban on naked sovereign CDS positions in certain extreme situations
  • Mandatory buy-in procedures in case of settlement failures

The main exemptions apply to market making activities, primary market operations, and to instruments whose principal market is outside the EU.

Competent authorities have powers to impose temporary additional measures. ESMA is to play a central role of coordination between Member States.

Industry implications

As a result of new transparency obligations, buy-side counterparties and broker-dealers have to develop solutions to collect information on time – so that disclosures are made no later than 3.30pm the following day – in an exhaustive manner and to ensure its correctness.

They must also be able to borrow the instruments in case of net short positions or that an arrangement is in place to borrow them in due time.

The new rules seem to have resulted in decreasing volumes in net short selling transactions and in settlement failures (to be assessed in conjunction with other drivers). At the same time, investors may turn to other types of transactions – such as exchange-traded derivatives – to replace net short selling transactions. On a number of occasions, national supervisors have used their power under the SSR to suspend or temporarily restrict short selling in certain instruments or on whole markets.

BNP Paribas Securities Services’ view

We support the introduction of greater transparency on these transactions and measures to reduce settlement failures.

However, this regulation has created additional reporting obligations. As a custodian, we offer our clients a full range of reporting services from the extraction of raw data to tailor-made reports.

From a regulatory perspective, the following developments are worth mentioning:

  • At this stage, authorities have not identified any need to revise the existing regulation on the basis of data available, meaning the existing regime will not undergo further major changes for now
  • The settlement regime in the Central Securities Depositary Regulation has replaced the settlement regime as defined in the Short Selling Regulation

Key dates

November 2012 - Entry into force of the SSR

June 2013 - ESMA guidelines on market making exemption and primary market operations

December 2013 - Report from the European Commission to the European Parliament and Council on the evaluation of the regulation (following ESMA’s final advice on this assessment)

July 2017 - ESMA’s public consultation on the implementation and impacts of SSR

December 2017 - ESMA’s report on the SSR and technical advice to EU Commission on amendments to SSR Regulatory Technical Standard

Download the regulatory memo:

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