ABI s remarks on European Commission s consultation on Short Selling

Transcription

1 ABI s remarks on European Commission s consultation on Short Selling 09/07/2010 POSITION PAPER Italian Banking Association, Piazza del Gesù 49, 00186, Rome, Italy Interest Representative ID number:

2 General remarks The Italian Banking Association (ABI) is pleased to contribute to the debate on the definition of regulatory initiatives on short selling at a European level, as the representative of the Italian banking industry. Short selling is an important tool used by intermediaries and investors in implementing their investment strategies. Further to this, it is a significant contributor to market efficiency. We appreciate the Commission s intention to fully address the issue at the European level, aimed at harmonising the European legislations on short selling and at creating of level playing field able to mitigate and progressively eliminate the existing differences in European markets. To this extent, ABI agrees that the ESMA should be the relevant institution to coordinate, along with national Authorities, the application of the regulation on short selling. In general terms, ABI agrees with the adoption of a disclosure regime for net short positions as there is no apparent market or regulatory failure that would justify (in accordance with the international best practice on better regulation ) any permanent ban on short selling. As we highlighted to CESR in occasion of past consultations, we have strong concerns on the real effectiveness of permanent measures of restriction on short selling aimed at preventing the downward trend of share prices. In our opinion, indeed, any restriction of such activity should be taken into consideration only in exceptional circumstances and, in any case, as a temporary measure. Having said that, ABI points out that the disclosure regime should be characterized by the reporting of individual net short positions only to the Authorities, if and when thresholds are exceeded. We do not support the proposal of reporting such positions to markets as this would most likely have the effect of discouraging short selling activity, considering that the disclosure to the public would risk exposing market operators to adverse market conduct. Ultimately, this would deprive the market of a tool that contributes to its efficiency. Pagina 2 di 10

3 Answers to specific questions Please, find below the relevant answers to the questionnaire of the consultation document. Section A Scope of financial instruments covered Q1. Which financial instruments give rise to risks of short selling and what is the evidence of those risks? Q2. What is your preferred option regarding the scope of instruments to which measures should be applied? Q3. In what circumstances should measures apply to transactions carried on outside the European Union? In ABI s general view, short selling contributes to market efficiency and does not represent, as such, a specific risk for the market as a whole. However, we recognise that when the volume of short selling on a specific security becomes excessively high, this market practice could potentially generate negative effects on the market (exacerbating the downward pressure). For this reason, ABI considers relevant to adopt a disclosure regime on net short positions as a mean for Authorities to gather information on the positions held by market participants for supervisory purposes. Yet, the scope of application, at this stage, should be delimited to shares and sovereign bonds only. ABI does not share the view of the European Commission (EC) on Credit Default Swaps (CDSs) being included in the scope of application of the short selling regulation as we believe that CDS trading might raise different types of concerns and therefore these financial instruments should be excluded from scope of these measures. ABI is of the opinion that these measures should be valid for all transactions on European securities executed on EU trading venues and, for as complex and challenging as it may result, on non-eu trading venues, in order to avoid any regulatory arbitrage. Pagina 3 di 10

4 Section B Transparency The disclosure regime should be characterized by the reporting of individual net short positions only to the Authorities, if and when thresholds are exceeded. The possibility of disclosing to the public could most likely have the effect of discouraging short selling activity, considering that the public disclosure would risk exposing market participants to adverse market conduct. As already commented in occasion of the public consultation held by CESR in July 2009 on a possible model for a pan-european short selling disclosure regime, ABI considers the thresholds therein defined to be excessively low and, as such, potentially penalising investors. Indeed, such thresholds, along with the public disclosure, would likely further discourage short selling because they would imply high disclosure costs. Q4. What is your preferred option in relation to the scope of financial instruments to which the transparency requirements should apply? Q5. Under Option A is it proportionate to apply transparency requirements to all types of instruments that can be subject to short selling? Q6. Under Option B do you agree with the proposals for notification to regulators and the markets of significant net short positions in EU shares? Q7. In relation to Option B do you agree with the proposals for notification to regulators of net short positions in EU sovereign debt (including through the use of CDS)? In addition to notification to regulators should there be public disclosure of significant short positions? Given our considerations above on thresholds, ABI agrees with CESR s transparency model and, in particular, considers option B as the viable solution, as it limits the scope of the disclosure regime to shares and sovereign bonds, thereby excluding CDSs. ABI is in favour of disclosing significant net short positions to the Authorities, for supervisory purposes, but on the other hand it strongly opposes to the disclosure of individual positions to the market, as it would make investors and intermediaries vulnerable to any adverse conduct by other market participants. As it specifically regards sovereign bonds, ABI considers that no information on positions held by individual investors should become available to public and, consequently, to Finance Ministries, as to avoid any possible political intervention. Pagina 4 di 10

5 Q8. Do you agree with the methods of notification and disclosure suggested? ABI agrees with the method of calculation of short positions presented by the Commission, i.e. the use of the individual short positions computed on a net basis. Indeed, the use of gross positions could generate information of little relevance, and not representative of the real exposure On the methods of disclosure, ABI is in favour of disclosing short position only to the Supervisory Authorities, and not to the market; competent Authorities should not publish individual data but aggregated information in order to inform the market. Q9. If transparency is required for short positions relating to sovereign bonds, should there be an exemption for primary market activities or market making activities? Market making activities, given their inherent characteristics, should be in any case excluded from the scope of the short selling regime, as limiting these activities could undermine market efficiency. Q10. What is the likely costs and impact of the different options on the functioning of financial markets? The level of costs of the two options presented by the Commission varies depending on firms internal structure, business models and the method chosen for the calculation of the position. However, excessively low thresholds would imply higher disclosure-related cost that, in turn, could be a deterrent to short selling, as already noted above. Pagina 5 di 10

6 Section C Uncovered Short Sales Q11. What are the risks of uncovered short selling and what is the evidence of those risks? Q12. Is there evidence of risks of uncovered short sales for financial instruments other than shares (e.g. bonds or sovereign bonds), which would justify extending the requirements to these instruments? ABI deems that, on a theoretical stand point, in some circumstances, uncovered short selling could potentially increase the risk of settlement failure. However, this type of risk is not related to the specific kind of instrument shortened, but to the naked short position itself. Also, ABI has not gathered sufficient evidence suggesting that shortening shares rather than bonds or sovereigns, has a higher or lower risk of settlement failure. However, before adopting any extension of the requirements suggested in the consultation document for naked short sales to instruments other than shares, it would be appropriate to conduct a specific risk assessment. With specific regard to CDSs, we consider that these financial instruments could not pose the risk of settlement failure, as CDS market has proven to be extremely liquid. Thus this kind of financial instrument should be excluded from the application of the proposed requirements. Q13. Do you agree with the proposed rule setting out conditions for uncovered short selling? Do you consider that more stringent conditions could be put in place? If so please indicate which ones? Do you agree that arrangements other than formal agreements to borrow should be permitted if they ensure the shares are available for borrowing at settlement? If so, why? As stated in the answer to Q12, naked short selling does entail, theoretically, a risk of settlement failure. This would lead us to be, in theory, in favour of the conditions proposed by the European Commission. However, on the day to day operative side, ABI deems that it would be too difficult, if not impossible, for any intermediary to actually run the relevant checks on the availability the instrument to be shortened (or the existence of an agreement which ensures that the instrument will be available at the time of settlement). Pagina 6 di 10

7 On the one hand, retail investors tend to keep their securities on an account held by the same intermediary through which they buy/sell on the market. On the other hand, institutional investors (even more if not domestic) tend to buy/sell securities on the market through intermediaries which do not hold, on their accounts, institutional investors securities. This makes it basically impossible to check whether the sale is covered or uncovered. Q14. Do you consider that the risks of uncovered short selling are such that they should be subject to an upfront ban/permanent restrictions? If so, why? ABI is not in favour of any upfront ban or permanent restrictions on uncovered short selling, as we consider that the proposed disclosure regime can allow Authorities to gather information on the positions held by market participant and, where necessary, to adopt appropriate measures. Q15. Do you agree with the proposal requiring buy in procedures for settlement failures due to short sales? If so, what is an appropriate base period that could be specified before buy in procedures are triggered (e.g. T + 4)? ABI deems this not to be the relevant venue to introduce changes to buy-in procedures, as the consultation somehow seems to imply. The only parties which could effectively intervene in a buy-in procedure, as buy-in agents, are CCPs, and not trading venues or settlement systems (as suggested by the Commission). Q16. Do you consider that there should be permanent limitations or a ban on entering into naked credit default swaps relating to EU sovereign issuers? If so, please explain why, including if possible any evidence relating to the use of naked CDS. ABI does not consider suitable the application of bans or permanent limitations on naked CDS short selling, for the reasons noted in the answer to Q12. Q17. Do you consider that in addition to the measures described above there should be marking of orders for shares that are short sales? ABI does not consider viable a system such that of marking orders, for the same reasons as detailed in the answer to Q13. Pagina 7 di 10

8 Q18. What is the likely costs and impact of the different options on the functioning of financial markets? ABI does not have sufficient evidence to substantiate the likely costs of the different options proposed. So, it considers necessary a thorough impact assessment by the Commission. Anyway, we acknowledge that the key features of the disclosure regime which determine the major part of the costs are represented by both the level of the thresholds for the disclosure of net short positions and the scope of application of the options which will be eventually chosen. Section D Exemptions Q19. Do you agree with the proposed exemption for market making activities? Which requirements should it apply to? ABI agrees with the suggested exemption for market making activities. Q20. Do we need any exemption where the principal market for a share is outside the European Union? Are any other special rules needed with regard to operators or markets outside the European Union? As noted above in the answer to Q3, EU measures should include all transactions executed on European trading venues. Q21. What would be the effects on the functioning of markets of applying or not applying the above exemptions? ABI considers crucial to define a detailed description of the exemptions to be granted and to closely monitor their actual use, in order to avoid that insufficient precision of these definitions could hamper the effectiveness of the exemptions. ABI considers that not granting exemptions for market making activities could severely inhibit market makers ability to provide liquidity and have a significant adverse impact on the markets efficiency, as stated by the Commission in the consultation document. Pagina 8 di 10

9 Section E Emergency powers of competent authorities ABI strongly supports that emergency powers of competent authorities on short selling should be as much harmonised and coordinated as possible, properly to avoid a possible lack of coordination, as it emerged during the recent financial crisis in occasion of the definition and adoption of measures on short selling by the European Member States. Q22. Should the conditions for use of emergency powers be further defined? ABI regards necessary to identify more accurately the specific criteria under which a (temporary) restricting measure of short selling activity would be justified, in order to avoid the adoption of measures inconsistent with current market conditions. Q23. Are the emergency powers given to Competent Authorities and the procedures for their use appropriate? Generally, ABI considers that powers to impose restricting measures on short selling activity should be given to ESMA and not to Member States Authorities, as to avoid the imposition of different measures that could create unlevel playing field and allow regulatory arbitrage. Q24. Should the restrictions be limited in time as suggested above? The measures eventually adopted on short selling should always be limited in time, as they are intended to be exceptional. To this extent, a three month period, suggested by the Commission, is considered an appropriate maximum timeframe. Q25. Are there any further measures that could ensure greater coordination between competent authorities in emergency situations? ABI considers appropriate adopting every measure that could improve the level of coordination among Member States and it deems that this task should be carried on only by ESMA. Thus, we consider appropriate that ESMA itself would consider this question. Pagina 9 di 10

10 Q26. Should competent authorities be given further powers to impose very short term restrictions on short selling of a specific share if there is a significant price fall in that share (e.g. 10%)? ABI considers that, in case of a significant price fall of a specific share, the Supervisory Authority should assess whether the price drop is due to its relevant company fundamentals or to other causes, among which market speculation. This shows how it is not appropriate to impose temporary restrictions on short selling prior to the identification of the causes of a price fall. Further to this, ABI considers the temporary restriction proposed by the Commission (i.e. the so-called tick rule), as an alternative to a disclosure regime of net short positions: we understand that this measure would align EU rules with US s but, in our view, the proposed disclosure regime would be itself sufficient to make available to Authorities the information necessary for any exceptional measure, should it be appropriate. Q27. Should the power to prohibit or impose conditions on short-selling be limited to emergency situations (as set out in the previous section)? As noted above, ABI considers that powers to impose conditions on short selling activity should be exceptional and, as such, should be limited in time. Q28. Are there any special provisions that are necessary to facilitate enforcement of the future legislation in this area? Q29. What co-operation powers should be foreseen for ESMA on an ongoing-basis? ABI considers appropriate that regulation Authorities would consider these questions. Section G Glossary of definitions Q30. Do the definitions serve their intended purpose? ABI does not have any specific comments on the proposed Glossary of definitions. Pagina 10 di 10