08.15.2011
By Terry Flanagan

EU Regulators Ban Short Selling

The European Securities and Markets Authority has announced that four European countries will impose a temporary ban on short-selling, effective Friday, in an effort to curb market volatility.

The ESMA, which is the European equivalent of the U.S. Securities and Exchange Commission, said that Italy, France, Spain and Belgium have all “decided to impose or extend existing short-selling bans in their respective countries. They have done so either to restrict the benefits that can be achieved from spreading false rumors or to achieve a regulatory level playing field, given the close inter-linkage between some EU markets.”

The move, which is effective as of Aug. 12, is also intended to prevent any further declines seen in European bank stocks. France’s Societe Generale saw its shares drop by as much as 23 percent in the past week of trading.

There is precedent for this type of move, and history shows that it doesn’t have any significant effect.

“I don’t think it will be all that effective,” said Michael Wong, an exchange analyst with Morningstar. “There is a precedent a few years ago, when the FSA in the U.S. implemented a ban of short selling of financials. The stocks still fell. It doesn’t improve confidence in the economy, or debt burdens of sovereign nations. It doesn’t address underlying problems for volatility.”

France and Spain each announced that their bans would last at least 15 days, and if necessary, could be extended further.

Jean-Paul Servais, chairman of Belgium’s Financial Services and Markets Authority, said that his country imposed the ban “in the light of the high level of volatility that financial markets are currently seeing, and out of a concern for consistency with the actions of other regulators” in the EU.

Spain’s Comision Nacional del Mercado de Valores said that the ban, which was in response to the “extreme volatility” in recent days, “affects any trade on equities or indices, including cash equities transactions, derivatives in regulated markets or OTC derivatives, that has an effect of creating a net short position or increase a previous one, even if on an intraday basis.”

The ESMA also reiterated its intent to enforce the Market Abuse Directive, which prohibits the spread of false information with regards to financial instruments. While the authority has levied the temporary banning of short-selling, it does so with the understanding that it is a legitimate trading tool, in and of itself.

“While short-selling can be a valid trading strategy, when used in combination with spreading false market rumors this is clearly abusive.”

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