Securities and markets regulatory news, 21 May 2021

Contents

• Download the full regulatory news bulletin
• EU SSR: ESMA proposes permanently lowering reporting threshold of net short positions
• IBA publishes GBP SONIA Spread-Adjusted ICE Swap Rate beta settings
• Global perspective on derivatives regulation: IOSCO speech

EU SSR: ESMA proposes permanently lowering reporting threshold of net short positions

The European Securities and Markets Authority (ESMA) has published an opinion in which it recommends that the European Commission permanently lowers the threshold to notify net short positions on shares to national competent authorities (NCAs), under Article 5(2) the Short Selling Regulation, from 0.2% to 0.1%.

ESMA has examined the evidence gathered after its successive emergency decisions, beginning in March 2020, which lowered, for the first time, the notification threshold to 0.1% on a temporary basis. The analysis showed that a substantial amount of additional and essential information became available to NCAs due to the reporting of net short positions at the level of 0.1%. ESMA states that this additional transparency to NCAs improved their ability to conduct market oversight. ESMA therefore considers it essential to lower the reporting threshold to 0.1% on a permanent basis.

Should the European Commission agree, it may adopt a delegated act modifying the notification threshold in Article 5(2) of the SRR.

IBA publishes GBP SONIA Spread-Adjusted ICE Swap Rate beta settings

ICE Benchmark Administration (IBA) has launched GBP SONIA Spread-Adjusted ICE Swap Rate "beta" settings for an initial testing period. The settings are designed to support the market in transitioning non-linear derivatives, structured products and cash market instruments that currently reference the GBP LIBOR ICE Swap Rate and have been determined in line with the methodology proposed by the Working Group on Sterling Risk-Free Reference Rates in its paper: "Transition in Sterling Non-Linear Derivatives referencing GBP LIBOR ICE Swap Rate (ISR)".

During the initial testing period, the settings are being provided solely for information and illustration purposes in order to enable recipients to evaluate and provide feedback on the GBP SONIA Spread-Adjusted ICE Swap Rate "Beta" settings. IBA emphasises that they are not to be used for any other purpose, including as a reference, index or benchmark in financial instruments, financial contracts, or investment funds.

Global perspective on derivatives regulation: IOSCO speech

The International Organization of Securities Commissions (IOSCO) has published a speech given by Ashley Alder, its CEO, on global issues relating to derivatives regulation. Points of interest include:

• Central counterparty (CCP)/margining practices: IOSCO has joined the Committee on Payments and Market Infrastructures (CPMI) and the Basel Committee on Banking Supervision (BCBS) to examine the dynamics of margin calls in derivatives markets during the market turmoil in spring 2020. They hope to get a clearer picture of transparency, predictability and volatility across different markets, jurisdictions and margining models, including any changes in the amount of margin and the timing of such changes.
• CCP resolution: there are unresolved questions about CCP resolution, including whose resources should be used to support CCP resolution, and in what proportion, and whether the CCP rulebooks provide sufficient incentives for all stakeholders to facilitate an orderly resolution. Mr Alder is working with the chairs of the Financial Stability Board (FSB), CPMI and the FSB Resolution Steering Group to tackle these issues.
• Archegos and financial stability: the Archegos incident raises questions about the scope and efficacy of some post-crisis reforms to the derivatives market. For example, would the BCBS-IOSCO margin requirements for non-centrally cleared derivatives, had they already been implemented, have worked to reduce losses arising in this type of incident? IOSCO is carrying out some work in this area.
• Trade repositories (TRs): the Archegos incident provides a good opportunity to assess the degree to which TRs are achieving their original objectives. Questions also arise as to the regulators' ability to use information in TRs to quickly detect an untoward build-up of risk before any blow-up. In theory, TRs should provide a good line of sight into a firm's exposures to multiple prime brokers and the associated aggregate leverage and concentration profiles of those exposures. IOSCO is doing more work to ensure that potential red flags are more apparent to regulators ex-ante.

Mr Alder also touches on IOSCO and the FSB's work to address potential resilience shortfalls in non-bank financial intermediation (NBFI). He explains that currently the most advanced workstream is exploring policy options to address potential vulnerabilities in money market funds that could affect financial stability. He states that IOSCO and the FSB plan to consult on NBFI resilience over the next few months.

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Authored by Yvonne Clapham