EU Exempts Market Makers from Short Selling Regulation

• The EU Regulation on Short Selling (SSR) introduces exemptions for market making activities, allowing certain investors to hold short positions without regulatory scrutiny.
• ESMA can intervene in exceptional circumstances by requiring additional reporting, disclosing information about NSPs, or introducing restrictions on short selling or NSPs.
• The SSR mandates that ESMA draft Regulatory and Implementing Technical Standards (RTS and ITS) to clarify and enhance the implementation of its intervention powers.

In exceptional circumstances, the European Securities and Markets Authority (ESMA) can intervene in the market by exercising its powers under the SSR.

EU Regulation on Short Selling (SSR) has introduced exemptions for market making activities, allowing certain investors to hold short positions without being subject to the same regulatory scrutiny as other short sellers. This exemption is designed to facilitate liquidity in financial markets and promote transparency. Market makers are required to meet specific conditions, including verifying their market-making activities with the relevant competent authorities (RCAs). Upon verification, RCAs can grant exemptions from the SSR's requirements, enabling market makers to engage in short selling without facing regulatory hurdles. The exemption is a key aspect of the SSR, as it aims to strike a balance between promoting liquidity and reducing settlement risks associated with naked short selling.

In exceptional circumstances, the European Securities and Markets Authority (ESMA) can intervene in the market by exercising its powers under the SSR. This includes requiring additional reporting from relevant competent authorities (RCAs), disclosing information about non-physical short positions (NSPs) to the public, or introducing restrictions on short selling or NSPs for specific financial instruments. ESMA's intervention powers are designed to mitigate systemic risks and maintain market confidence in exceptional situations. The SSR mandates that ESMA draft Regulatory and Implementing Technical Standards (RTS and ITS) to clarify and enhance the implementation of these intervention powers.

The EU Regulation on Short Selling (SSR) establishes a comprehensive regulatory framework for short selling activities in the European Union. The SSR aims to increase transparency, reduce settlement risks, and ensure that Member States have clear powers to intervene in exceptional situations. To achieve these objectives, the SSR introduces a series of requirements, including exemptions for market making activities and authorised primary dealers. ESMA is responsible for drafting guidelines and technical standards to support the implementation of the SSR, ensuring consistency across EU member states.

Lawyers should watch for the updated ESMA guidelines on exemption for market making activities, as non-compliance may lead to regulatory scrutiny and potential fines.

Source: Original reporting via EU Regulation on Short Selling and certain aspects of credit default swaps