In this series, one of FundApps’ dedicated compliance experts covers a regulatory issue. This week, we have Karl Schindler, FundApps’ Head of Content, writing about home Member State.
You may be asking yourself, what’s all this noise about “home Member State”. What home? Member of what? What does this have to do with compliance, shareholding disclosure, and transparency regulation?
Regardless of where your firm is located, if it is engaged in either direct short selling or “effective” short selling (via derivatives) of securities traded on regulated EU markets, multilateral trading facilities (MTFs) or European sovereign debt, the concept of home Member State is critical to ensuring you are accurately complying with disclosure and transparency regulations.
Here, the relevance of the ‘home Member State’ concept when applying EU (European Union) Short Selling regulation will be explained. We’ll define what the term ‘home Member State’ actually means, and discuss how FundApps’ Rapptr can streamline the process.
Wide application of EU Short Selling Regulation:
You might say “Our firm doesn’t short equity traded on an EU market!”
While that might be true, it’s important to consider that the EU Short Selling Regulation also applies to large variety of derivatives which result in (even if embedded layers down in a multi-level derivative) any effective short position in a) security traded on an EU regulated market/MTF or b) EU Sovereign Debt.
Purchasing a put option on a security that trades in the EU? You may have a disclosure obligation. At the least, firms have a requirement to quantitatively assess whether a short position exists. This determination requires one to take into account numerous factors, such as the derivatives delta value (if one exists) amongst other things.
Are you only holding index derivatives? There is still a requirement to calculate look-through exposure. These are just a few examples!
Why Home Member State?
Once you’ve accurately determined that you have a disclosable (effective) short selling position:
- How do you then determine which assets to add to or net against each other?
- How do you then determine which regulatory agency do you deliver the disclosure to?
The answer to both is… Home Member State!
What is Home Member State?
The phrase “Member State” simply refers to the particular country/state which is a member of the EU. The word “home” is used in distinction to “host” in describing the country (and its regulatory body) that govern the disclosure obligations for a given security. In each home Member State, a disclosure will be made to the “relevant competent authority” in the particular Member State. To avoid duplicate reporting in the EU, a relevant competent authority of the home Member State concept is employed to harmonise the obligations across all EU Member States.
Without a determination of home Member State for each security's issuer, the correct calculations cannot be made.
How Rapptr automates this for you:
One of the benefits of Rapptr is that we do not require you to populate the country whose regulatory authority you must report to under EU rules.
Instead, we take advantage of publicly available regulatory data which is updated by ESMA, the EU authority who maintain a list of “ Shares admitted to trading on EU Regulated Markets.” We scrape this data continuously and utilise it in all of our rules covering the EU Short Selling Regulation. This data is always available for viewing and querying by users in Rapptr.
If you are curious about what justifies the use of the regulatory authority listed on the MiFID-related ”Shares admitted to trading on EU Regulated Markets” list, see the “Regulatory Justification” section at the end of this article.
Although each EU country’s regulator is responsible for updating ESMA with this information, there are times that it can become temporarily out of date or that a specific security’s ISIN isn’t listed. Where this is the case, there is a multi-step selection hierarchy to how Rapptr populates home Member State, designed in accordance with the regulation.
This ensures that each security is picked up where a disclosure may need to be made. Rapptr automates all of this and also reports back to the user how the value for home Member State has been populated.
Home Member States can be a confusing concept for a number of different reasons. There may be solutions available that allow their users to disclose based on home Member State. However, only FundApps provides a solution that combines the technology for monitoring on this criteria, the regulatory updates to ensure you’re up to date and and a dedicated content team to make updates based off of the changing regulation. This is why FundApps has more users than any other automated regulatory solution.
Our cloud-based service, trusted by some of the asset management industry's biggest names, monitors 400+ rules in 90+ jurisdictions. EU short selling regulation is one of our most well loved features, but we cover much more.