23/11/2017 – By Gaurav Chandra, Product Manager, AxiomSL EMEA
The European Union’s (EU) Short Selling Regulation (SSR) came into force on 1st November 2012, with the main objective to enhance transparency on short positions held by investors in specified EU securities, ensure financial stability and protect market confidence. The SSR presented private and public notification obligations for financial institutions (FIs) that hold net short positions (NSP) in certain financial instruments of shares, sovereign bonds and sovereign credit default swaps (CDS).
Short selling is the practice of selling financial instruments that are usually borrowed (not owned by the seller) and bought back later at a declined price to return it to the lender. Under SSR, net short positions of 0.2% and above in any share must be disclosed privately and 0.5% or more result in a public disclosure to the relevant national competent authority (NCA). The SSR also enforces additional restrictions on uncovered (naked) short positions in shares and sovereign debt.
All the EU Member States plus Norway, Iceland and Liechtenstein are obliged to comply with the SSR with the required information to be provided to the European Securities Markets Authority (ESMA). Given its wide-reaching scope, the regulation continues to present considerable challenges to the investment management companies, fund managers and sovereign wealth funds in the EU and around the globe, despite already being fully applicable since 2012.
Current Challenges of the ESMA SSR
Even though the introduction of the SSR has assisted in increasing transparency and reducing risks, FIs across the Europe have continued to face implementation challenges in ensuring timely submissions of disclosable events. In addition, EU regulators have demonstrated an assertive approach levying fines on firms that have breached jurisdictional regimes and we’ve observed a fair few hedge fund and investment management firms being penalised for missing certain reporting timelines. This stance from the certain regulators has created a ripple effect for other NCAs to be more rigorous which increases the pressure on market participants.
The biggest challenge of ESMA SSR is the daily monitoring and subsequent daily reporting timelines. Firms are required to submit the disclosures before 3.30pm on the trading day and given the complexity of the trading, getting the required reporting out in seven to eight hours every day can be extremely demanding. Late notifications are set to cause breaches of the SSR that will urge competent authorities to take action to enforce adherence to the SSR regime.
In an attempt to be compliant with the ESMA SSR reporting, some firms follow manual processes that create more burden than benefit. These upstream systems can potentially trigger substantial delays or have a reportable trade missed easily. As is the nature of manual tasks, resolving these problems can be tremendously costly and time consuming and pose a significant operational risk. Ultimately, firms struggle to get the report out the door on time and enter a vicious circle of regulatory reporting management. In order to avoid fines, market participants have to possess better control in ensuring accurate and timely reporting.
Following a strategic approach
With this level of increased scrutiny, today’s constantly-evolving regulatory landscape calls for an automated solution with multi-jurisdictional capability as well as global regulatory coverage. In order to prevent any potential breach, firms must first identify their jurisdiction and understand its specific reporting obligations. AxiomSL’s Shareholding Disclosures solution offers a complete end to end automation, monitoring and reporting for ESMA short selling regime and similar regimes in other jurisdictions.
Through our strategic regulatory platform, we allocate the position of FIs according to their relevant jurisdictions, calculate the net short positions in shares, sovereign debt and sovereign CDS in compliance with the rules of each regulator, include indirect exposures through exchange-traded funds (ETFs) and apply different aggregation rules for the investment and non-investment activities. Governance, automation and transparency benefits of our platform eliminate any operational risks or human error that comes with manual processes, whilst ensuring accurate and timely reporting. Our inherent data management capabilities can transform and modify the data if needed through our Data Dictionary (DD) mapping whilst enhancing the data quality. Furthermore, AxiomSL platform populates the necessary report in the required format and enables firms to submit them directly from the solution to the correct jurisdiction.
Regulatory rules change at an exponential pace which necessitates a flexible and business friendly strategic platform that can reduce cost and increase operational efficiency. AxiomSL continually updates its solutions to reflect any regulatory changes and offers business friendly rule maintenance. Overall, this strategic approach greatly reduces the cost and complexity of compliance in managing your regulatory reporting.
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