Annexes to SEC(2010)1055 - SUMMARY OF THE IMPACT ASSESSMENT Accompanying document to the Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on Short Selling and certain aspects of Credit Default Swaps - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | SEC(2010)1055 - SUMMARY OF THE IMPACT ASSESSMENT Accompanying document to the Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF ... |
|---|---|
| document | SEC(2010)1055  |
| date | September 15, 2010 |
3. Option 3 – introduce EU rules on settlement discipline so that persons engaging in short sales which result in a failure to deliver face appropriate penalties, with buy-in procedures and fines in case of settlement failures. Compatible with 2.
4. Option 4 - introduce a ban on naked short selling
5. Option 5 - exemption for market making activities and certain primary market operations. Compatible with 2, 3 and 4.
4.4.Policy options to ensure a coordinated response by EU member states to short selling and CDS
This objective should be met by the above three categories of targeted options. In addition, the choice of legal instrument should also aim to ensure coordinated national responses.
5.Assessment and Comparison of the options
The different policy options were tested against the criteria of their effectiveness and efficiency in achieving the related objectives. The comparison of policy options lead to the following conclusions:
- Clear powers: the preferred option is a combination of option 5 (emergency powers), and option 2 (circuit breaker). A combination of the two options would give regulators an instrument to impose a short term ban on short selling on organised markets in the event of a significant price decline as well as the possibility to impose a temporary ban of a longer duration, capturing derivatives as well, in the event of an exceptional situation.
- Transparency: the preferred option is a combination of options 2, 3, 4, 6 and 7. By combining options 3 and 4, the objective of transparency for both regulators and the market would be achieved fully. In addition, a higher threshold for notification to the market would mitigate any impact on liquidity, while ensuring that regulators obtain the data they require. Option 6 (individual disclosure) should also be part of the preferred option, as it meets the objectives more fully by providing the market with more detailed transparency. Option 2 (flagging) would complement disclosure very effectively by providing regulators with real time data on all short positions, thereby capturing intraday positions and helping regulators with enforcement. Finally, option 7 (market making and primary market operations exemption) would ensure that the important liquidity provision function of these activities would be able to continue, which would mitigate any potential impact on liquidity of disclosure.
- Settlement discipline: the preferred option is a combination of options 2, 3 and 5. If options 2 and 3 were combined, settlement discipline would be reinforced both by requirements at the point of trading and by buy-in procedures and fines, thereby meeting very effectively the related operational objective. By combining option 5 with options 2 and 3, the potential negative impact on liquidity would be mitigated by a harmonised exemption for market making, and so would the potential for regulatory arbitrage and compliance costs associated with different exemptions across the EU.
- Coordinated response: non-legislative cooperation is discarded because it would not provide an effective solution to uncoordinated national actions leaving scope for regulatory arbitrage and higher compliance costs. A Regulation should be preferred to a Directive as it is immediately applicable, would ensure uniform rules throughout the EU and those concerned by its provisions would be able to depend on them immediately.
6.impacts of the preferred options
| Impact on stakeholders | Effectiveness | Efficiency | |
| Options 2 + 5 (circuit breaker and powers in exceptional situations) | (+++) regulators gain powers to ban short selling/CDS in exceptional situations and short term (+++) issuers' share price can be supported by a temporary ban on short selling in distressed markets (0) governments: reduced volatility on sovereign bond markets, but risk of negative effects on liquidity (- -) financial institutions may be temporarily restricted from short selling & face compliance costs | (+++) achieves objective 1 fully (+++) Objective 4: fully met (+++) avoids unduly negative effects on market efficiency | (-) reduced compliance costs due to coordinated EU approach; any effect on liquidity temporary |
| Options 2+ 3 + 4 +6 + 7 (flagging, notification to regulator and disclosure to market of individual net short positions, with exemption for market makers and primary market dealers) | (+++) regulators: full transparency on short positions (+++) issuers: access to data on significant short positions and full benefit of liquidity provided by market makers (+++) individual investors: information asymmetries eliminated and liquidity provided by market makers maintained (+++) governments: liquidity in sovereign bonds not impaired (- ) financial institutions: compliance costs and likely to reduce short selling to avoid disclosure to public, but can continue market making activities | (+++) Objective 2:fully met (+++) Objective 4: fully met (++) limits unduly negative effects on market efficiency | (- ) ongoing compliance costs; impact on market liquidity mitigated by thresholds and exemption |
| Options 2+3+5 (locate rule, and settlement discipline with exemption for market makers and primary market dealers) | (+++) regulators can sanction naked short selling (+++) issuers: number of shares sold short cannot exceed the number issued or available to borrow, liquidity not impaired due to market maker exemption (+++) governments: number of government bonds sold short cannot exceed the number issued or available to borrow, liquidity not impaired due to market maker exemption (+ ) some financial institutions may have to adapt their compliance systems, but market making exempt | (++) Objective of reducing settlement risk achieved by rules at the point of trading and settlement discipline (+++) Objective 4: met in full (+) Contributes to reducing risk of negative price spirals | (-) some ongoing compliance costs although many already operate locate rule; impact on liquidity mitigated by market maker exemption |
The Commission will monitor how Member States are applying the changes proposed in the legislative initiative on short selling. The evaluation of the legislative measure could take place three to five years after its entry into force, in the context of a report to the Council and the Parliament on the appropriateness of the reporting and public disclosure thresholds.
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