European Regulators Pull Short-Sale Policy Lever

The global financial markets have entered a period of extreme turbulence and uncertainty as the coronavirus pandemic continues to grip markets. That goes without saying. But as coronavirus prevention and containment measures roll out in countries across the globe, regulators have been vigilantly watching for areas they can intervene or even assist markets. We previously covered the overarching statements of the various global regulators, but more recently some European regulators have tapped one of the few policy levers open to them: a ban on short-selling. 

We can leave the relative merits and effectiveness of such bans to another day, but it is worthwhile looking at some of the specific actions that have been taken in Europe which have direct impact on asset managers in terms of portfolio management and regulatory reporting. 

National Short Sale Bans

Under EU law, national regulators retain powers to introduce such bans over their domestic stock markets and are merely required to inform the European Securities and Markets Authority (ESMA). A number of national regulators have decided to exercise this discretion. The current short selling bans in Europe include:

  • The Spanish regulator Comision Nacional Del Marcado de Valores (the CNMV) has put in place a ban which runs until April 17. The ban can be extended if needed but may also be lifted before the one-month deadline.
  • In Italy, Commissione Nazionale per le Società e la Borsa (CONSOB) have implemented a similar short selling ban, but the ban only applies to one trading day (March 17). CONSOB may implement further bans on a day-to-day basis.  
  • So too have the Authoritie des Marches Financiers (AMF) in France, banning the short selling of the 92 most impacted stocks. Like Italy, the ban ended at the end of the trading day (March 17), but could be extended, if needed.
  • The Financial Services and Markets Authority (FSMA) in Belgium mirrored actions to those of CONSOB and AMF.
  • The Financial Conduct Authority (FCA) in the United Kingdom have 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 coordinated cross border regulatory activity.

ESMA Temporary Reporting Regime

Aside from the various national short-sale bans, ESMA has also temporarily lowered the threshold at which funds and asset managers must report to national regulators on net short selling positions from 0.2% to 0.1% of the issued share capital of a company. According to ESMA’s statement, the precautionary move is directly linked to the “exceptional circumstances linked to the ongoing COVID-19 pandemic” and the desire to monitor the markets. The temporary measure is effective immediately (since market close on March 16) and runs for three months, but possibly longer should circumstances warrant it. Asset managers in the scope of the new ESMA requirements must now recalibrate their reporting requirements promptly to comply. 

Bottom Line

What these regulatory actions illustrate is how fluid the regulatory response has been – with more volatility, comes a more concerted response from regulators. So far, the areas of focus have been on fund liquidity with many regulators requesting additional reporting on redemption activity, Business Continuity Processes (BCP), and, in the US, provision of regulatory relief in certain targeted areas.

While these are uncertain times, one thing is certain: This is not the last we’ll hear from global regulators as the crisis unfolds. We’ll be here, delivering updates as new developments emerge.