ESMA Guidelines on the exemption for market makers under the Short Selling Regulation

The Central Bank has notified ESMA that it will not apply certain parts of the ESMA Guidelines on the ‘Exemption for market making activities and primary market operations under Regulation (EU) 236/2012 of the European Parliament and the Council on short selling and certain aspects of Credit Default Swaps’ (“Short Selling Regulation”).

The purpose of the Guidelines is to ensure a level playing field, consistency of market practices and convergence of supervisory practices across the EEA. These objectives are fully supported by the Central Bank of Ireland. However, the level playing field is undermined by the fact that a significant number of National Competent Authorities do not apply the Guidelines in full. To the extent the Guidelines are not applied they are not effective, and implementation of these Guidelines has become problematic.

Until the lack of convergence is remedied, the Central Bank of Ireland will apply the Guidelines save for the provisions that are not applied by other national competent authorities, specifically relating to requirements to be a member, in all cases, of a trading venue where the market making is carried out (paragraphs 19-22; 35-36; 43 first bullet and last bullet), and the scope of products in which market making can be carried out in order to avail of the exemption (paragraphs 30; 32).

The decision of the Central Bank means that firms that wish to avail of the exemption set out in Article 17 of the Short Selling Regulation for market making activities described in Article 2(1)(k)(iii) of that regulation may do so in respect of sovereign debt to hedge positions in corporate bonds, provided that there is a correlation between the two. For these purposes the correlation required for the hedging to qualify for the exemption is limited to the benchmark sovereign that the corporate bond is priced and/or actively traded against. Evidence of this correlation must be presented to the Central Bank upon notification of an intention to avail of the exemption.