10.05.2012
By Terry Flanagan

Esma Selling Itself Short, Warn Market Users

Market participants say that the European Securities and Markets Authority (Esma), the pan-European regulator, is struggling to meet the deadline to issue guidelines surrounding the European Union’s proposed new rules on short selling.

The Paris-based watchdog has come under criticism for failing to get on top of issuing the new guidelines which, some industry experts say, will put the brakes on securities lending activity and be harmful to liquidity in general as it will hamper market making activities. The new EU regulation is due to come into force on November 1.

Esma instigated an eleventh-hour consultation in mid-September on market maker and primary dealer exemptions to the new rules. A lot of ‘shorts’ are done by market makers to hedge their positions, who provide continuous two-sided quotes in many securities. Many hedge funds and high-frequency traders also use short-selling as part of their strategies.

“Esma is under severe pressure to meet the deadlines on short selling,” Mark Spanbroek, secretary-general of Brussels-based FIA European Principal Traders Association, a proprietary trading group which represents firms that trade their own capital on European exchange-traded markets such as Knight Capital, Optiver, Getco, Citadel Securities and Quantlab Financial, told Markets Media.

“It is up to the ceiling on this,” said Spanbroek, who attended an open hearing Esma held on short-selling in Paris earlier this week. “The level one text has yet to be agreed, let alone the [more detailed] level two text. It is frustrating as Esma has no budget available to cope with it all.”

The purpose of the regulation, which was adopted by the European Commission in July, was to bring in strict new rules on short selling and allow for a common regulatory approach across the 27 member states.

Short-selling bans in Europe were imposed by Spain, Italy, Belgium and France in August 2011 to help restore confidence to equity markets following eurozone debt fears. Spain and Italy reactivated their bans in July this year as their countries were firmly dragged back into the eurozone crisis. However, each nation slightly differed in their approach to implementing the short-selling bans.

Esma’s guidelines—and the market making exemptions—are intended to support the creation of a level-playing field across the European Union.

“These guidelines are aimed at providing market users and national regulatory authorities with clarity on the criteria to be met in applying for a market making exemption, and the conditions to be used in assessing those applications,” said Steven Maijoor, chair of Esma last month when announcing the six-week consultation.

“The guidelines will ensure that market participants can continue to operate in the knowledge that the same criteria are being used and applied in a consistent manner by national regulatory authorities across the European Economic Area, thereby ensuring a level playing field for all.”

The closing date for responses to the Esma consultation is today.

The new regulations will force market users involved in short selling to notify authorities when they intend to ‘short’ 0.2% or more of a company and will have to publicly reveal when they have net short positions of over 0.5% in any given company’s stock. The rules also cover certain aspects of sovereign credit default swaps.

Esma yesterday also published a list of exempted shares under the regulation.

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