ESMA bulldozes over British pleas on short selling
23 January 2014 Brussels
Image: Shutterstock
The UK government’s efforts to curb the power of EU financial watchdogs were in vain, after it was ruled that Brussels has the power to ban short selling.
Judges from the European Court of Justice rejected all of Britain’s to limit the power of Brussels. The UK had argued that the European Securities and Markets Authority (ESMA) had been given a very large measure of discretion of a political nature, which was at odds with EU principles relating to the delegation of powers.
It also submitted that ESMA’s regulation aimed at harmonising short selling—based on article which permits the adoption of harmonisation measures necessary for the establishment and functioning of the internal market— was not the correct legal basis for the adoption of the rules laid down in Article 28 of the regulation, which vests the European Securities and Markets Authority (ESMA) with certain powers of intervention that are legally binding.
But the court found that Article 28 of the regulation does not confer any autonomous power on ESMA that goes beyond the powers granted to that authority when it was created. The court also pointed out that the exercise of the powers laid down in that provision is circumscribed by various conditions and criteria which limit ESMA’s discretion.
The court also observed that ESMA is required to consult the European Systemic Risk Board and, if necessary, other relevant bodies.
“Furthermore, ESMA must notify the competent national authorities concerned of the measure it proposes to take. ESMA is also under a duty to review the measures at appropriate intervals (at least every three months), so that such measures may only be temporary,” said the judgement.
“Moreover, the detailed delineation of the powers of intervention available to ESMA is apparent from the fact that the commission is empowered to adopt delegated acts specifying criteria and factors to be taken into account by the competent authorities and ESMA in determining in which cases certain adverse events or developments and the threat to the financial markets or the stability of the EU’s financial system arise.”
“In those circumstances, the court finds that the powers available to ESMA are precisely delineated and amenable to judicial review in the light of the objectives established by the authority which delegated those powers to it. The court concludes that those powers are compatible with the FEU Treaty.”
In June 2013, ESMA stated that the EU’s new short selling regulation had “a positive effect on market transparency and reducing the risk of settlement failure in Europe”, but admitted that adjustments still needed to be made.
ESMA was asked to carry out a review of the effects of the short selling regulation shortly after it was implemented in November 2012. After seven months of assessment, the authority said that the short selling regulation had “mixed effects” on the liquidity of EU stocks, “with a slight decline in volatility, a decrease in bid-ask spreads and no significant impact on traded volumes”.
But price discovery speed “seems to have decreased compared to the period before the entry into force of the regulation”, although “overall, settlement discipline has improved”.
ESMA’s report said: “Overall, it seems that market participants had a tendency to settle on one side or the other of the threshold and avoid crossing it. This would suggest that holders’ behaviour is pre-determined, ie, over time a holder is sticking to its initial decision on whether to go public on a given position.”
“This would mean that the public disclosure threshold has an effect on short-selling activities, and even though no strict conclusion is to be drawn from the available data, it can be suspected that some actors prefer to stay below the 0.5 percent threshold and not to disclose information on their short-selling activity.”
ESMA’s statement added that the short selling regulation had “no compelling impact on the liquidity of EU single name CDS and on the related sovereign bonds markets ... except in a few countries”.
“The liquidity in European sovereign CDS indices has been somewhat reduced.”
ESMA recommended changing the way that net short positions in shares are calculated, and revisiting the method of calculation of net short positions in sovereign debt, particularly the duration-adjusted approach, and reviewing the thresholds for notifications.
For restrictions on uncovered short sales in shares and sovereign debt, ESMA recommended considering some adjustments to the regime to allow internal locate arrangements within the same legal entity.
It also suggested revisiting the issue of the definition of ‘liquid shares’ for the purpose of locate arrangements at a later stage, when proper regulatory data on securities lending would be available.
The authority also looked at emergency short selling bans, such as the one that is in operation in Greece, recommending that they should be simplified and made more consistent in their application.
Judges from the European Court of Justice rejected all of Britain’s to limit the power of Brussels. The UK had argued that the European Securities and Markets Authority (ESMA) had been given a very large measure of discretion of a political nature, which was at odds with EU principles relating to the delegation of powers.
It also submitted that ESMA’s regulation aimed at harmonising short selling—based on article which permits the adoption of harmonisation measures necessary for the establishment and functioning of the internal market— was not the correct legal basis for the adoption of the rules laid down in Article 28 of the regulation, which vests the European Securities and Markets Authority (ESMA) with certain powers of intervention that are legally binding.
But the court found that Article 28 of the regulation does not confer any autonomous power on ESMA that goes beyond the powers granted to that authority when it was created. The court also pointed out that the exercise of the powers laid down in that provision is circumscribed by various conditions and criteria which limit ESMA’s discretion.
The court also observed that ESMA is required to consult the European Systemic Risk Board and, if necessary, other relevant bodies.
“Furthermore, ESMA must notify the competent national authorities concerned of the measure it proposes to take. ESMA is also under a duty to review the measures at appropriate intervals (at least every three months), so that such measures may only be temporary,” said the judgement.
“Moreover, the detailed delineation of the powers of intervention available to ESMA is apparent from the fact that the commission is empowered to adopt delegated acts specifying criteria and factors to be taken into account by the competent authorities and ESMA in determining in which cases certain adverse events or developments and the threat to the financial markets or the stability of the EU’s financial system arise.”
“In those circumstances, the court finds that the powers available to ESMA are precisely delineated and amenable to judicial review in the light of the objectives established by the authority which delegated those powers to it. The court concludes that those powers are compatible with the FEU Treaty.”
In June 2013, ESMA stated that the EU’s new short selling regulation had “a positive effect on market transparency and reducing the risk of settlement failure in Europe”, but admitted that adjustments still needed to be made.
ESMA was asked to carry out a review of the effects of the short selling regulation shortly after it was implemented in November 2012. After seven months of assessment, the authority said that the short selling regulation had “mixed effects” on the liquidity of EU stocks, “with a slight decline in volatility, a decrease in bid-ask spreads and no significant impact on traded volumes”.
But price discovery speed “seems to have decreased compared to the period before the entry into force of the regulation”, although “overall, settlement discipline has improved”.
ESMA’s report said: “Overall, it seems that market participants had a tendency to settle on one side or the other of the threshold and avoid crossing it. This would suggest that holders’ behaviour is pre-determined, ie, over time a holder is sticking to its initial decision on whether to go public on a given position.”
“This would mean that the public disclosure threshold has an effect on short-selling activities, and even though no strict conclusion is to be drawn from the available data, it can be suspected that some actors prefer to stay below the 0.5 percent threshold and not to disclose information on their short-selling activity.”
ESMA’s statement added that the short selling regulation had “no compelling impact on the liquidity of EU single name CDS and on the related sovereign bonds markets ... except in a few countries”.
“The liquidity in European sovereign CDS indices has been somewhat reduced.”
ESMA recommended changing the way that net short positions in shares are calculated, and revisiting the method of calculation of net short positions in sovereign debt, particularly the duration-adjusted approach, and reviewing the thresholds for notifications.
For restrictions on uncovered short sales in shares and sovereign debt, ESMA recommended considering some adjustments to the regime to allow internal locate arrangements within the same legal entity.
It also suggested revisiting the issue of the definition of ‘liquid shares’ for the purpose of locate arrangements at a later stage, when proper regulatory data on securities lending would be available.
The authority also looked at emergency short selling bans, such as the one that is in operation in Greece, recommending that they should be simplified and made more consistent in their application.
NO FEE, NO RISK
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Securities Finance Times
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Securities Finance Times
