Spain
01 February 2011
Despite the country’s financial woes, a vibrant securities lending market still exists in Spain, even though short selling rules are some of the toughest in the Western world
Image: Shutterstock
Spain has been hard hit by the global economic downturn. The country has long had a significant focus on the property market - anyone who visits one of the Costas will know that new developments have been springing up rapidly, with deals for ex-pats from across Europe luring them to a life of sun, sea and relaxation.
But it wasn’t just in the resorts that the building boom was felt. Spain’s major cities have also rebuilt their residential and commercial property portfolios, with price rises in double digits for many years. Then it stopped. And while price falls may not have been similar to those of Detroit or some other American industrial towns, they have still been pretty calamitous. Developments have been left unfinished and those that are complete often stand virtually empty.
This of course has had an effect on the banking industry. The Spanish banking environment is relatively conservative, leaving the multinationals - the Santanders and the BBVAs - in prime position to take advantage of the slowdown in the world markets. But the local banks, which had greater focus on the domestic housing market, have struggled.
Just in the last couple of weeks, the Government announced plans to pour billions more euros into its troubled savings banks and force them to be more open about their lending practices. In a first step, “Spain is preparing to issue EUR 3 billion in debt in coming days,” says one source. “Government officials are putting plans in place to eventually raise as much as EUR 30 billion, though the final tally may well be less.”
Securities lending
Securities lending is common practice in Spain. Every loan executed in the Spanish market must be communicated to Iberclear who keeps control of loans outstanding for the purpose of returning to the original owner, when the loan is paid back, the same Register Reference (RR) numbers that were originally submitted. Although security loan accounts are kept separately within the position of each of the participants for the type of security in question, Iberclear attributes the possible economic rights that might be accrued during the term of the loan to the borrower, who is obliged by his contract to compensate the lender outside the system.
Stock lending enables shares to be transferred for an agreed period in return for a commission.
The advantages of this product, for the lender as well as the borrower, lie behind the surge in stock lending since it was established in October 1992.
The lender can obtain an extra return from stable portfolios and the borrower can carry out hedging operations in the futures and options markets, adopt selling positions in the open market in the face of downward trends and cover positions in shares where there is a debtor balance at the time of settlement.
If the stock from a stock lending trade is intended to be used to cover a short sale in the market, the stock needs to be in place, and the sale settled before 15:00 on value date. A two-day grace period is granted after trade date to receive stock from loan to cover a sale. Therefore, if stock is received from a loan on TD+3 but the sale is not settled before 15:00, then a short sale fine of -200 bp would be applied. If the loan settles on TD+4, then a 10bp fine would be applied after 15:00. If not settled before 15.00 on TD+4, the trade is bought in by the CSD.
Short selling
Short selling is forbidden in the Spanish market. Even in an intraday basis. Financial intermediaries are not required to verify themselves or their clients’ global position and can accept an express declaration from clients stating that they are not executing a naked short selling operation. This declaration can also be general; in this case intermediaries are not obliged to ask for the client’s declaration for every single operation.
The CNMV introduced new measures on short selling, effective from June 10, 2010.
The requirements are as follows:
Investors will be required to disclose their short positions on any stock or cuota participativa (non-voting stocks issued by Spanish savings banks), admitted to trading in Spanish official secondary markets (currently this only applies to certain financial companies).
Investors will be required to disclose to the CNMV when the short position exceeds 0.2 per cent of the outstanding capital admitted to trading. In addition, investors will also have to declare changes in a previously communicated position when it falls below that percentage. Finally, whenever an already communicated position trespasses (downwards or upwards) one tenth of a percentage point of the issued shares, an update will have to be provided. Currently the threshold is 0.25 per cent.
All notifications about short positions that exceed 0.5 per cent of the outstanding capital will be published on the CNMV website, including the identity of the holder.
CNMV will also publish the aggregated amount of short positions that are communicated but not individually posted (since they are above 0.2 per cent but below 0.5 per cent).
Investors holding a short position above 0.2 per cent when these measures come into effect are obliged to communicate their positions to the CNMV under the new requirements.
The future
Spain’s economic viability remains in doubt for some investors, but the government has put in place a series of austerity measures designed to pull the country out of the mire.
What will help the market is Spain’s investment in the growing economies of Latin America, where historic ties mean the banking sector in many of these countries is dominated by Iberian banks. So while Spain struggles today, tomorrow still looks bright. SLT
But it wasn’t just in the resorts that the building boom was felt. Spain’s major cities have also rebuilt their residential and commercial property portfolios, with price rises in double digits for many years. Then it stopped. And while price falls may not have been similar to those of Detroit or some other American industrial towns, they have still been pretty calamitous. Developments have been left unfinished and those that are complete often stand virtually empty.
This of course has had an effect on the banking industry. The Spanish banking environment is relatively conservative, leaving the multinationals - the Santanders and the BBVAs - in prime position to take advantage of the slowdown in the world markets. But the local banks, which had greater focus on the domestic housing market, have struggled.
Just in the last couple of weeks, the Government announced plans to pour billions more euros into its troubled savings banks and force them to be more open about their lending practices. In a first step, “Spain is preparing to issue EUR 3 billion in debt in coming days,” says one source. “Government officials are putting plans in place to eventually raise as much as EUR 30 billion, though the final tally may well be less.”
Securities lending
Securities lending is common practice in Spain. Every loan executed in the Spanish market must be communicated to Iberclear who keeps control of loans outstanding for the purpose of returning to the original owner, when the loan is paid back, the same Register Reference (RR) numbers that were originally submitted. Although security loan accounts are kept separately within the position of each of the participants for the type of security in question, Iberclear attributes the possible economic rights that might be accrued during the term of the loan to the borrower, who is obliged by his contract to compensate the lender outside the system.
Stock lending enables shares to be transferred for an agreed period in return for a commission.
The advantages of this product, for the lender as well as the borrower, lie behind the surge in stock lending since it was established in October 1992.
The lender can obtain an extra return from stable portfolios and the borrower can carry out hedging operations in the futures and options markets, adopt selling positions in the open market in the face of downward trends and cover positions in shares where there is a debtor balance at the time of settlement.
If the stock from a stock lending trade is intended to be used to cover a short sale in the market, the stock needs to be in place, and the sale settled before 15:00 on value date. A two-day grace period is granted after trade date to receive stock from loan to cover a sale. Therefore, if stock is received from a loan on TD+3 but the sale is not settled before 15:00, then a short sale fine of -200 bp would be applied. If the loan settles on TD+4, then a 10bp fine would be applied after 15:00. If not settled before 15.00 on TD+4, the trade is bought in by the CSD.
Short selling
Short selling is forbidden in the Spanish market. Even in an intraday basis. Financial intermediaries are not required to verify themselves or their clients’ global position and can accept an express declaration from clients stating that they are not executing a naked short selling operation. This declaration can also be general; in this case intermediaries are not obliged to ask for the client’s declaration for every single operation.
The CNMV introduced new measures on short selling, effective from June 10, 2010.
The requirements are as follows:
Investors will be required to disclose their short positions on any stock or cuota participativa (non-voting stocks issued by Spanish savings banks), admitted to trading in Spanish official secondary markets (currently this only applies to certain financial companies).
Investors will be required to disclose to the CNMV when the short position exceeds 0.2 per cent of the outstanding capital admitted to trading. In addition, investors will also have to declare changes in a previously communicated position when it falls below that percentage. Finally, whenever an already communicated position trespasses (downwards or upwards) one tenth of a percentage point of the issued shares, an update will have to be provided. Currently the threshold is 0.25 per cent.
All notifications about short positions that exceed 0.5 per cent of the outstanding capital will be published on the CNMV website, including the identity of the holder.
CNMV will also publish the aggregated amount of short positions that are communicated but not individually posted (since they are above 0.2 per cent but below 0.5 per cent).
Investors holding a short position above 0.2 per cent when these measures come into effect are obliged to communicate their positions to the CNMV under the new requirements.
The future
Spain’s economic viability remains in doubt for some investors, but the government has put in place a series of austerity measures designed to pull the country out of the mire.
What will help the market is Spain’s investment in the growing economies of Latin America, where historic ties mean the banking sector in many of these countries is dominated by Iberian banks. So while Spain struggles today, tomorrow still looks bright. SLT
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