ESMA launches short selling consultation
24 January 2012 Paris
Image: Shutterstock
The European Securities and Markets Authority (ESMA) has released a consultation draft on short selling and CDS. Some of the aims of the 55+ page document are to clarify the meaning of “reasonable expectation” for locating shares or sovereign bonds and to define which third parties will be eligible to provide confirmations.
In general, the test for reasonable expectation for the borrowing of shares or sovereign debt requires that a third party confirms that, at least, the share has been located and that the third party has taken measures to ensure settlement can be effected when it is due. The language is similar for uncovered short sales.
For intraday short selling, the reasonable expectation test is met by obtaining a confirmation that the shares are easy to borrow or purchase from the third party from which the location confirmation was sought. However, ESMA notes that this means investors are required to provide a statement as well as continuously monitor the uncovered short position. In addition, the investor has to provide instructions to the third party to procure remaining shares not covered by same day purchases.
Eligible third parties include authorised investment firms, trading venues, CCPs, securities settlement systems, central banks, a national debt management entity or an active participant which qualifies under EU law and can provide data on its ability to deliver in time for settlement. ESMA added that confirmation should come from parties that will have some kind of involvement in the process for the location, borrowing or purchasing of the shares or sovereign debt instruments and not from “disinterested third parties who do not put any skin in the game”. As such, providers of data on securities lending markets, actors and activity are not included as eligible third parties.
In November 2011, the Council and the Parliament voted on a regulation on short selling and certain aspects of credit default swaps. The regulation is expected to come into effect starting November this year and ESMA is to submit its technical standards by the end of March. The consultation period ends on 13 February.
In general, the test for reasonable expectation for the borrowing of shares or sovereign debt requires that a third party confirms that, at least, the share has been located and that the third party has taken measures to ensure settlement can be effected when it is due. The language is similar for uncovered short sales.
For intraday short selling, the reasonable expectation test is met by obtaining a confirmation that the shares are easy to borrow or purchase from the third party from which the location confirmation was sought. However, ESMA notes that this means investors are required to provide a statement as well as continuously monitor the uncovered short position. In addition, the investor has to provide instructions to the third party to procure remaining shares not covered by same day purchases.
Eligible third parties include authorised investment firms, trading venues, CCPs, securities settlement systems, central banks, a national debt management entity or an active participant which qualifies under EU law and can provide data on its ability to deliver in time for settlement. ESMA added that confirmation should come from parties that will have some kind of involvement in the process for the location, borrowing or purchasing of the shares or sovereign debt instruments and not from “disinterested third parties who do not put any skin in the game”. As such, providers of data on securities lending markets, actors and activity are not included as eligible third parties.
In November 2011, the Council and the Parliament voted on a regulation on short selling and certain aspects of credit default swaps. The regulation is expected to come into effect starting November this year and ESMA is to submit its technical standards by the end of March. The consultation period ends on 13 February.
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