FIRDS, Primary Market, and the EU SSR
This article discusses the FIRDS list, Primary Market and the EU Short Selling regime (EU SSR).
- The FIRDS Exempt List and the EU SSR
- FundApps actions
Since the implementation of the FIRDS list as the updated (official) source for the determination of the country of the Relevant Competent Authority (RCA) in Europe, where an EU Short Selling regime related disclosure should be made, we have received feedback on:
a) the number of new disclosures prompted by the use of FIRDS, where the quality of the underlying data in FIRDS (specifically the selection of the RCA) has been called into question; and
b) feedback from individual RCA's (regulators) in Europe that differs from the disclosure result generated from the FIRDS data in FundApps.
FundApps takes the stance that both the core regulatory documents and Aosphere memos establish FIRDS as the source which determines whether a given security is trading on either an EU Regulated Market or an EU MTF. Local EU national regulators have on occasion disagreed with the RCA indicated by ESMA (in FIRDS) and have even rejected specific disclosures. We'd like to note that it is the duty of the local regulator, along with ESMA, to ensure the FIRDS database is correct.
In cases where FundApps has helped our clients follow up on what they deemed to be incorrect RCA determinations in FIRDS, ESMA and the local regulators blame each other for the discrepancy without offering a solution. We suggest continuing to make disclosures as prompted by our SSR rules, which are based on FIRDS and the official exempt list.
Although the regulation allows for an exemption of securities based on primary market trading outside of the EU, the determination of this exemption is not up to each market participant. Rather, it is determined by the specific official exempt list, published by ESMA and populated by national regulators. The FCA has rejected valid disclosures where the FCA or a client “deemed” the primary market to be outside of Europe but have NOT reflected it on the official exempt list. FundApps does not recommend choosing not to disclose as this is not in line with the regulation.
The foremost legal sources for this are Aosphere memos and the ESMA Q&A on the EU SSR. Read on for a detailed explanation of how the exempt list interacts with the EU SSR.
The ESMA Exempt List and the EU SSR
The scope of shares caught is set out in the Aosphere on-screen report under "EU Member States" and under the Short Selling tab, Disclosure Obligation, "Which shares are caught". This reflects the SSR, which first sets out the obligation to disclose in Art 5/Art 6, i.e. where the company has shares admitted to trading on a regulated market or MTF in the EU, and then goes on in Art 16 to exempt those shares where the principal venue is outside the EU.
In that section, it notes that the relevant competent authority determines whether the principal venue is outside the EU and submits this to ESMA, which publishes the list of exempt shares. This is the process set out in Art 16(2) of the SSR.
Please also note ESMA's Q&A: "Question 1e: What financial instruments are covered by the net short position notification and disclosure requirements, and the restrictions on uncovered short sales? Is there a list available and where can it be found? Answer: [I have deleted part of the text for brevity…] With respect to shares, the Regulation on short selling and certain aspects of CDS requires that a list of exempted shares is published by ESMA on its website on the basis of the information provided by national competent authorities. Therefore, any share not mentioned in that list that is admitted to trading on a regulated market in the EEA or traded on a MTF in the EEA is subject to the requirements of the Regulation."
Please note in the following section which is a part of Answer 1e in the Q&A, there is a reference to the (old) MIFID database (now replaced by FIRDS) for how to determine the shares in scope:
"It should be noted that ESMA has already published a list of shares admitted to trading on an EEA regulated market (http://mifiddatabase.esma.europa.eu/) which identifies the relevant competent authority for each share for the purpose of the Regulation."
Contacting the RCA to resolve anomalies
The above is based on the Aosphere memo regarding EU SSR, where page 11 provides a useful summary. Clients may wish to seek independent legal advice for bespoke queries.
In the event of rejected disclosures, or if you believe a share should be added to ESMA's Exempt list, FundApps suggests contacting the RCA listed in FIRDS in the first instance.
If you believe a different RCA should be responsible for a specific share, FundApps suggests contacting the RCA you believe should be responsible to ask them to update FIRDS.
FundApps suggests that clients continue to make disclosures in line with FIRDS and the Exempt list, which is what FundApps uses to generate alerts, as set out above.
Please let us know if you have any further questions or concerns about this.