ESMA Publishes Review on Impact of Short Selling Regulation

The European Securities and Markets Authority (ESMA) has published its review evaluating the impact of the regulation on short selling and certain aspects of credit default swaps (CDS) on European financial markets.

ESMA is responding to a European Commission (EC) request for technical advice to inform its report to the European Parliament and Council on the impact of the regulation, due by the end of this month.

The advice was requested only shortly after the implementation of the regulation on 1 November 2012 and so there were limits to the market data available, and limited regulatory experience in supervising the regulation’s requirements to draw on. 

ESMA’s report makes a number of recommendations that would help to improve how the regulation works in practice, with the overall recommendation that the regime be re-assessed at a future date when more data and experience have been accumulated.

Given the review’s limitations, its key findings so far on the regulation’s impact on market conditions are as follows:

  • There have been mixed effects on the liquidity of EU stocks, with a slight decline in volatility, a decrease in bid-ask spreads and no significant impact on traded volumes. Price discovery speed appears to have decreased compared to the period before the entry into force of the regulation.
  • Overall, settlement discipline has improved.
  • No compelling impact on the liquidity of EU single name CDS and on the related sovereign bond markets could be noticed, except in a few countries. The liquidity in European sovereign CDS indices has been somewhat reduced.


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