In the last month, there have been some developments in relation to the EU Regulation 236/2012 on short selling and certain aspects of credit default swaps (Regulation). In this article, we summarise what you need to know.
New FCA registration and notification forms
Firms that are subject to the provisions of the Regulation will need to be aware of the following changes to the process of registration with, and notification to, the Financial Conduct Authority (FCA), which took effect on 10 June:
reporting persons making the notifications on behalf of a position holder must register with the FCA using the new form available on the FCA website. If reporting persons have already made notifications or disclosure before 10 June, there is no need to re-register,
there will be one form to make all share notifications (including corrections and deletions to previously made notifications), to be sent either to the private or public disclosure mailboxes, and
there will be one form to make all sovereign debt or credit default swap notifications (including corrections and deletions to previously made notifications), to be sent to the private disclosures mailbox.
FCA revised note on the UK notification process for market makers and authorised primary dealers
The FCA has published a revised note on the UK notification process for market makers and authorised primary dealers, which supersedes the version published by the Financial Services Authority (FSA) on 26 September 2012. The revised note has been updated to take into account the new Guidelines issued by the European Securities and Markets Authority (ESMA) on the exemption which entered into force on 2 June 2013. The document sets out the definitions of market makers and authorised primary dealers; the scope of the exemptions; and the process and forms for notifying the FCA. In its note, the FCA states that firms that have already notified the FSA or FCA in order to take advantage of the exemption do not need to notify the FCA again if they intend to continue using the exemption. However, they must notify the FCA if they wish to vary the financial instruments they use the exemption for, or if any changes occur that affect their eligibility, or intention to use, the exemption.
ESMA publishes report on its evaluation of the impact of the Short Selling Regulation
On 3 June 2013, ESMA published its Technical Advice, which evaluates the impact of the Regulation on European financial markets. The Technical Advice considers market feedback received in response to ESMA's call for evidence in March 2013, which was covered in our article in the March corporate newsletter. ESMA initiated its call in response to a request by the European Commission to consider the impact of the Regulation since its implementation on 1 November 2012. The Commission will consider the Technical Advice before producing its own report on the Regulation for the European Parliament and Council.
Read with caution
ESMA notes that, as it was required to produce a report only a short period after the implementation of the Regulation on 1 November 2012, only limited market data and regulatory experience in supervising the Regulation were available. ESMA makes a number of recommendations in relation to how the Regulation should work in practice but also recommends that the regime should be re-assessed in the future, when it can have access to further data and analyse the impact of the Regulation over a longer period.
Click here to read ESMA's recommendations. Some of the key recommendations are noted below.
Transparency and reporting requirements
ESMA considers that the current reporting and disclosure thresholds for shares are appropriate and should remain unchanged. However, it does suggest considering some technical improvements to the method for calculating net short positions in shares, which include suggestions to facilitate the access by investors to the details of issued share capital and information on indices. ESMA recommends that the method of calculation of net short positions in sovereign debt be reviewed further, together with the relevant notification thresholds.
Buy-in procedures and penalties for settlement discipline
Whilst ESMA notes that the Regulation is the first experience of EU-wide mandatory requirements on buy-in procedures and penalties for settlement discipline, ESMA believes that these requirements and penalties would be more extensively dealt with in a single piece of horizontal European legislation, namely the forthcoming EU regulation on central securities depositaries and securities settlement. This will ensure consistency in the application of buy-in and settlement procedures across member states, whilst including specific provisions dealing with illiquid shares and SMEs' shares.
Restrictions on uncovered sovereign CDS transactions
ESMA was asked to consider the impact of the ban on uncovered sovereign CDS transactions. It notes that, in general, the restriction seems to have had no compelling impact to date, although a decline in activity for sovereign CDS in a few EU countries and reduced liquidity in European sovereign CDS indices should be noted. Consequently, ESMA recommends that this area should be kept under review.
Exemptions for market making activities
ESMA notes that the arguments for an exemption for market makers and authorised primary dealers remain valid. However, there are certain areas of the exemption which require further review. In particular, ESMA recommends that the scope of the financial instruments should be expanded and the list of products for which the exemption is available should be explicitly stated, whether in the definition of market making activities, or in separate technical standards, to assist the application of the exemption by relevant issuers.
The report is a useful snapshot of the impact of the Regulation across the markets to date, although, as ESMA notes, it should be read with caution, given that only a limited amount of market data was available to it during the course of its review. ESMA observes that, at this stage, the impact of the Regulation on market liquidity appears to be mixed so it will be interesting to see whether the Commission will propose any further changes in its report to the European Parliament and Council, or whether it will wait for a further assessment of the Regulation which is likely to reveal a more accurate position of its impact on the markets.