The
European Securities and Markets Authority (ESMA) has published new guidance
regarding the use of circuit breakers by trading venues to protect markets
against excessive volatility. Circuit breakers temporarily halt or restrict
trading during periods of significant price movements.
Circuit
breakers serve as an essential safeguard during times of high market volatility
and stress. By temporarily pausing trading, circuit breakers aim to restore
orderly market conditions and give market participants time to reassess
valuations and their trading strategies.
Recent
events like Russia’s invasion of Ukraine and the May 2022 “flash
crash” led to extreme volatility in commodity derivatives and equity
markets. The presence of well-calibrated circuit breakers can mitigate the
impact of such volatility, providing a controlled environment for market
participants to navigate through uncertain times.
đź”´ #ESMA provides an overview of supervisory expectations regarding the calibration of circuit breakers implemented by #trading venues.
Aim → convergence on calibration methodology, promoting compliance, common understanding and enforcement practiceshttps://t.co/hKkqVRIewq pic.twitter.com/DIn3Iq2Qid
— ESMA – EU Securities Markets Regulator 🇪🇺 (@ESMAComms) October 12, 2023
This makes
them an indispensable tool for maintaining the overall health and integrity of
financial markets. For this reason, ESMA
has presented its expectations for the effective implementation of circuit
breakers.
Overview of New ESMA
Guidance
The new
supervisory briefing from ESMA provides a comprehensive overview of regulatory
expectations regarding circuit breaker calibration by trading venues. Key
aspects include:
- Outlining principles for
effective circuit breaker implementation that national regulators should
enforce - Promoting greater convergence
in circuit breaker calibration methods - Covering static price limits
and dynamic price collars - Applicable across asset classes,
especially commodity derivatives
National
regulators will inform trading venues in their jurisdiction about the new
supervisory expectations. Trading venues are then expected to review and adjust
their circuit breaker mechanisms as needed to align with ESMA’s guidance
Key implementation steps:
- Assess
current circuit breaker calibration - Make necessary adjustments to
align with ESMA principles - Improve calibration to manage
volatility better - Report updated circuit breakers
to national regulators
ESMA aims
to enhance the ability to manage volatility across EU financial markets by
improving circuit breaker calibration. A few months ago, the institution was already “praising” some European regulators for improving their practices.
The
European Securities and Markets Authority (ESMA) has published new guidance
regarding the use of circuit breakers by trading venues to protect markets
against excessive volatility. Circuit breakers temporarily halt or restrict
trading during periods of significant price movements.
Circuit
breakers serve as an essential safeguard during times of high market volatility
and stress. By temporarily pausing trading, circuit breakers aim to restore
orderly market conditions and give market participants time to reassess
valuations and their trading strategies.
Recent
events like Russia’s invasion of Ukraine and the May 2022 “flash
crash” led to extreme volatility in commodity derivatives and equity
markets. The presence of well-calibrated circuit breakers can mitigate the
impact of such volatility, providing a controlled environment for market
participants to navigate through uncertain times.
đź”´ #ESMA provides an overview of supervisory expectations regarding the calibration of circuit breakers implemented by #trading venues.
Aim → convergence on calibration methodology, promoting compliance, common understanding and enforcement practiceshttps://t.co/hKkqVRIewq pic.twitter.com/DIn3Iq2Qid
— ESMA – EU Securities Markets Regulator 🇪🇺 (@ESMAComms) October 12, 2023
This makes
them an indispensable tool for maintaining the overall health and integrity of
financial markets. For this reason, ESMA
has presented its expectations for the effective implementation of circuit
breakers.
Overview of New ESMA
Guidance
The new
supervisory briefing from ESMA provides a comprehensive overview of regulatory
expectations regarding circuit breaker calibration by trading venues. Key
aspects include:
- Outlining principles for
effective circuit breaker implementation that national regulators should
enforce - Promoting greater convergence
in circuit breaker calibration methods - Covering static price limits
and dynamic price collars - Applicable across asset classes,
especially commodity derivatives
National
regulators will inform trading venues in their jurisdiction about the new
supervisory expectations. Trading venues are then expected to review and adjust
their circuit breaker mechanisms as needed to align with ESMA’s guidance
Key implementation steps:
- Assess
current circuit breaker calibration - Make necessary adjustments to
align with ESMA principles - Improve calibration to manage
volatility better - Report updated circuit breakers
to national regulators
ESMA aims
to enhance the ability to manage volatility across EU financial markets by
improving circuit breaker calibration. A few months ago, the institution was already “praising” some European regulators for improving their practices.
