03.18.2020
By Shanny Basar

Some European Countries Ban Short Selling

Some European countries have banned short selling on equities as volatility has increased, but this is unlikely in the UK.

Adrian Whelan, BBH

Adrian Whelan, senior vice president and head of regulatory intelligence for investor services at Brown Brothers Harriman, said on the BBH On The Regs blog that under European Union law, national regulators can introduce short selling bans on their domestic stock markets without permission from the European Securities and Markets Authority, although they should then inform Esma.

Whelan noted that the action taken by regulators on short selling include:

  • The Spanish regulator, Comision Nacional Del Marcado de Valores, prohibiting short sales until April 17.  The CNMV can extend the ban if needed,  but it may also be lifted before the one-month deadline.
  • The Italian regulator, Commissione Nazionale per le Società e la Borsa,(Consob) implementing bans on a day-to-day basis, such as on March 17.
  • The French regulator, the Authoritie des Marches Financiers, banning short selling of 92 stocks until March 17. The AMF could extend the prohibition, if needed.
  • The Financial Services and Markets Authority (FSMA) in Belgium mirroring Consob and the AMF.

In addition, today the the Austrian Financial Market Authority (FMA) temporarily prohibited the short selling of certain financial instruments on the Vienna stock exchange for one month, although the ban may be repealed earlier or extended depending on market developments.

Helmut Ettl and Eduard Müllee, FMA’s executive directors, said in a statement: “In the difficult situation caused by the economic impact of the COVID-19 virus pandemic, the stability of the financial markets and maintaining the confidence of investors in the orderly functioning of the markets must have absolute priority. This national measure is therefore both inevitable and appropriate.”

Whelan said the UK’s Financial Conduct Authority has implemented a targeted short-sale ban on Belgian and Italian stocks to ensure those national bans couldn’t be circumvented by trading through London instead, showing some positive co-ordinated cross border regulatory activity.

Nick Bayley, managing director and head of Duff & Phelps’ compliance and regulatory consulting practice, noted in a statement that the FCA itself has not banned short selling of any UK stocks and is unlikely to do so.

“In the height of the global financial crisis, the FCA did briefly ban the short selling of financial stocks and it led to significant price dislocations and confusion in the market,” he added. “I fully expect that in this post-Brexit world, the ‘Northern European’ stance, that two views make a market and that short selling has a legitimate role, will continue to prevail here despite the market turmoil.”

Whelan said that as volatility continues there will be a more concerted response from regulators. He continued that, so far, they  have focussed on fund liquidity with requests for additional reporting on redemption activity; business continuity processes; and the US authorities have granted regulatory relief in certain targeted areas.

The FCA has also informed firms of the regulator’s expectations of their response to the Coronavirus (Covid-19), especially as staff work from home:

“Firms should continue to record calls, but we accept that some scenarios may emerge where this is not possible,” said the FCA. “Firms should make us aware if they are unable to meet these requirements.”

The UK regulator said that if firms experience difficulties in submitting their regulatory data, they should maintain appropriate records during this period and submit the data as soon as possible.

Whelan said: “While these are uncertain times, one thing is certain: This is not the last we’ll hear from global regulators as the crisis unfolds.”

Esma

Esma has agreed to the emergency short selling prohibitions from the relevant national regulators as current adverse events constitute a serious threat to market confidence and financial stability.

The regulator said the bans apply to transactions executed both on a trading venue or over the counter, and to any natural or legal person domiciled or established within the European Union or in a third country

In addition, Esma is temporarily requiring the holders of net short positions in shares traded on a EU regulated market to notify the relevant national competent authority.

The regulator said in a statement: “Esma considers that lowering the reporting threshold is a precautionary action that, under the exceptional circumstances linked to the ongoing COVID-19 pandemic, is essential for authorities to monitor developments in markets. The measure can support more stringent action if required to ensure the orderly functioning of EU markets, financial stability and investor protection.”

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