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The common English saying, “possession is 9/10ths of the law” can often be applied when facing small, everyday challenges such as, “Who really booked this meeting room for 3:00 p.m.?” Those sitting in the room tend to win the argument. The European Securities and Markets Authority has been looking hard at the concept of ownership in developing its new regulations on short selling, known as SSR.
The crux of the matter rests on what exactly constitutes a naked short sale; if you own something and then sell it, by simple definition this is not a naked short. However, on first pass, ESMA’s draft SSR indicated that the sale of a lent security would constitute a naked short sale – meaning trouble for the seller. Looking further into the implications of defining ownership brought custodian nominees and the exercising of options and futures into the analysis.
It seems that ESMA has done its homework, and its new Technical Advice on Short Selling has clarified many issues.
Unintended consequences are a very serious risk when new legislation is being drawn up, and that risk is often greater when regulations must be written in a hurry. The objective of protecting the investor and the marketplace from naked shorting is an admirable one, but sometimes rules meant to make the market more efficient risk doing more damage than good. It is positive to see that ESMA has provided these securities lending clarifications which should hopefully bring the rules back in line with the original aims without harming the markets they seek to protect.
This content is provided by an external author without editing by Finextra. It expresses the views and opinions of the author.
Rolands Selakovs Founder at avoided.io
14 February
Sergei Grechkin Chief Risk Officer at AIFM Cayros Capital
Katherine Chan CEO at Juice
Yuval Shuminer CEO at Piere
13 February
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