ESMA short selling drafts keep coming
21 February 2012 London
Image: Shutterstock
With one comment period for ESMA's latest standards on short selling and credit default swap (CDS) rules ended and the next one released, participants have spoken out over the short time frame provided while also expressing concerns over definitions contained in the technical advice.
In the first set of published responses for the comment period beginning 24 January and ending 13 February, nearly all of the firms representing stakeholders of the borrowing and lending community pointed out that the compressed timetable may impede the European financial markets regulator's aims.
In general, industry responses called for more clarification on which actors could be considered third parties and which agreements would be acceptable as part of an 鈥渆xhaustive list鈥�.
One of the requirements is that short positions should always be covered in advance. Richard Frase, partner at Dechert, suggests that there is ambiguity in the ESMA draft around the acceptability of prime brokerage agreements which have auto borrow arrangements. Prime brokers operate arrangements for covering their hedge fund clients鈥� short positions which may not always amount to a formal pre-agreed loan.
鈥淚t鈥檚 not clear in the ESMA technical standards draft whether this kind of fluid arrangement will be accepted as a covered short,鈥� Frase said. A further glitch is ESMA鈥檚 proposal that a firm cannot obtain cover for its shorts from an internal trading desk within the same organisation. This appears to be based on a literal reading of the level 1 regulation and would penalise large banking businesses which organise themselves as a single legal entity rather than as a group structure.
The next round of short selling consultations ends 9 March with an open hearing scheduled for 29 February. This draft is not particularly controversial, he notes, but is tackling highly technical issues such as threshold calculations and reporting requirements for short sales.
鈥淭he method for calculating net short selling provisions is complicated and somewhat duplicitous. Positions have to be aggregated by reference to the decision maker concerned, and also by reference in the case of a fund manager, to funds under management, and in the case of a group by aggregating group holdings. For a large group or business this will be a potentially challenging exercise, particularly within the time scale that legislators envisage,鈥� Frase said.
Firms may have had similar experiences under the transparency rules, where they are required to report shareholdings above a five per cent threshold, with positions being aggregated across different business structures.
ESMA expects a final report and submission of the draft advice to the Commission by mid-April with regulations due to enter into force in November, which will then be binding across all EU member states.
鈥淚f I am mildly positive about this, it is because everything I have read suggests that there is a genuine desire to get a consistent approach across Europe to these rules鈥his is just crystallising the position so that market participants know where they stand,鈥� said Frase, adding, however, that the prohibition of CDS on sovereign loans is 鈥渏ust protectionist panic鈥�.
In the first set of published responses for the comment period beginning 24 January and ending 13 February, nearly all of the firms representing stakeholders of the borrowing and lending community pointed out that the compressed timetable may impede the European financial markets regulator's aims.
In general, industry responses called for more clarification on which actors could be considered third parties and which agreements would be acceptable as part of an 鈥渆xhaustive list鈥�.
One of the requirements is that short positions should always be covered in advance. Richard Frase, partner at Dechert, suggests that there is ambiguity in the ESMA draft around the acceptability of prime brokerage agreements which have auto borrow arrangements. Prime brokers operate arrangements for covering their hedge fund clients鈥� short positions which may not always amount to a formal pre-agreed loan.
鈥淚t鈥檚 not clear in the ESMA technical standards draft whether this kind of fluid arrangement will be accepted as a covered short,鈥� Frase said. A further glitch is ESMA鈥檚 proposal that a firm cannot obtain cover for its shorts from an internal trading desk within the same organisation. This appears to be based on a literal reading of the level 1 regulation and would penalise large banking businesses which organise themselves as a single legal entity rather than as a group structure.
The next round of short selling consultations ends 9 March with an open hearing scheduled for 29 February. This draft is not particularly controversial, he notes, but is tackling highly technical issues such as threshold calculations and reporting requirements for short sales.
鈥淭he method for calculating net short selling provisions is complicated and somewhat duplicitous. Positions have to be aggregated by reference to the decision maker concerned, and also by reference in the case of a fund manager, to funds under management, and in the case of a group by aggregating group holdings. For a large group or business this will be a potentially challenging exercise, particularly within the time scale that legislators envisage,鈥� Frase said.
Firms may have had similar experiences under the transparency rules, where they are required to report shareholdings above a five per cent threshold, with positions being aggregated across different business structures.
ESMA expects a final report and submission of the draft advice to the Commission by mid-April with regulations due to enter into force in November, which will then be binding across all EU member states.
鈥淚f I am mildly positive about this, it is because everything I have read suggests that there is a genuine desire to get a consistent approach across Europe to these rules鈥his is just crystallising the position so that market participants know where they stand,鈥� said Frase, adding, however, that the prohibition of CDS on sovereign loans is 鈥渏ust protectionist panic鈥�.
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