Short selling ban extended
30 August 2011 London
Image: Shutterstock
All four European nations which introduced short selling bans in mid-August extended those decisions, while market participants struggle to adapt to disparate rules.
Belgium, France, Italy and Spain released statements detailing the companies affected by the ban, as well as limits and exceptions under the coordination of the European Securities Markets Authority (Esma). Authorities in all four countries will review the bans at the end of September and, in an attempt to harmonise, Greece announced its intention to do so as well. In total, authorities in 29 European countries have an assortment of short selling restrictions of varying lengths.
Regulators stressed that the measures are intended to prevent market abuse.
“I dont' think there is a genuine concern among regulators that there is widespread market abuse using the mechanism of short selling,” said Darren Fox, partner at law firm Simmons & Simmons. “Often, market abuse is a convenient label for regulators to use in order to exercise powers they have been granted by their parliaments to take these kinds of short-term prohibitive measures, powers that they would not have in the absence of that label.”
French banks' share prices were hit particularly hard in early August, with some suffering double-digit losses, when market rumours spread about a potential downgrade of France's sovereign debt. All three major rating agencies denied this was the case.
On August 18, French regulator, the Autorite des marches financiers (AMF), was forced into ignominious retreat when it could not impose restrictions on traders rolling over short positions on indices operated by Stoxx.
The resulting market frustrations meant Fox spent the whole of last week talking about nothing but short selling with his primarily buy side clients.
The ban prohibits net short positions in an underlying stock in an index, explains Fox, but each regulator has also introduced exemptions for the purposes of hedging risk of exposure to European equity markets.
“We have had literally hundreds and hundreds of inquiries by phone and email every day since the bans were introduced,” he says. “There is an enormous sense of confusion and the market needs clarity, while regulators have been very reluctant to give any ground in terms of explaining the finer details of their hedging exemptions.”
Though the law firm has a regular quarterly online product (called Navigator) to inform clients about the varying regimes, changes during the latest European short selling ban have been so frequent that over and above regular website updates, Simmons & Simmons has started a twitter feed.
“We thought twitter would be an efficient delivery mechanism to communicate changes quickly to clients, particularly as they might be trading one minute but the regulator changes its mind and then [the trade] becomes a problem,” said Fox.
The majority of ban inquiries, he notes, have related to indices - particularly the Eurostoxx50 SX5E contract, a broad based index containing nine of the banned stocks. Hedge fund managers are unsure about whether their portfolios meet the required standards in order to be able to use that index in accordance with the various hedging exemptions.
Responding to that market need, US-based derivatives exchange OneChicago offered futures in the four country specific ETFs a week after the ban was implemented.
“We listed these products to provide an avenue for market participants to gain or adjust short delta exposure to equities in the countries that instituted the ban,” wrote Tom McCabe, COO of OneChicago.
“Our securities futures products were not subject to that ban, and in fact do not have any short delta restrictions,” he said.
Fox says that this kind of product, which replicates an index but without the banned stock, will be interesting to traders that typically use the Eurostoxx50 to go directionally short in the eurozone countries. The problem, he says, is whether liquidity will be there when a trader wants to exit the position.
Meanwhile, critics of such bans point out the inefficacy of the strategy in stabilising asset prices.
Before the short sale ban was even implemented, global securities lending flow data showed that the scale of short selling was dwarfed by the supply of shares to short and nowhere near the levels reach ahead of the last credit crisis in 2008, according to Data Explorers.
Moreover, the securities lending research firm states that there is little discernible pattern when comparing price changes in the week with levels of short interest for European large caps.
That, according to Data Explorers, reinforces the argument that the price drop in the first week of August, immediately after the US debt downgrade and about week before the short sale ban, had little do with short selling.
Belgium, France, Italy and Spain released statements detailing the companies affected by the ban, as well as limits and exceptions under the coordination of the European Securities Markets Authority (Esma). Authorities in all four countries will review the bans at the end of September and, in an attempt to harmonise, Greece announced its intention to do so as well. In total, authorities in 29 European countries have an assortment of short selling restrictions of varying lengths.
Regulators stressed that the measures are intended to prevent market abuse.
“I dont' think there is a genuine concern among regulators that there is widespread market abuse using the mechanism of short selling,” said Darren Fox, partner at law firm Simmons & Simmons. “Often, market abuse is a convenient label for regulators to use in order to exercise powers they have been granted by their parliaments to take these kinds of short-term prohibitive measures, powers that they would not have in the absence of that label.”
French banks' share prices were hit particularly hard in early August, with some suffering double-digit losses, when market rumours spread about a potential downgrade of France's sovereign debt. All three major rating agencies denied this was the case.
On August 18, French regulator, the Autorite des marches financiers (AMF), was forced into ignominious retreat when it could not impose restrictions on traders rolling over short positions on indices operated by Stoxx.
The resulting market frustrations meant Fox spent the whole of last week talking about nothing but short selling with his primarily buy side clients.
The ban prohibits net short positions in an underlying stock in an index, explains Fox, but each regulator has also introduced exemptions for the purposes of hedging risk of exposure to European equity markets.
“We have had literally hundreds and hundreds of inquiries by phone and email every day since the bans were introduced,” he says. “There is an enormous sense of confusion and the market needs clarity, while regulators have been very reluctant to give any ground in terms of explaining the finer details of their hedging exemptions.”
Though the law firm has a regular quarterly online product (called Navigator) to inform clients about the varying regimes, changes during the latest European short selling ban have been so frequent that over and above regular website updates, Simmons & Simmons has started a twitter feed.
“We thought twitter would be an efficient delivery mechanism to communicate changes quickly to clients, particularly as they might be trading one minute but the regulator changes its mind and then [the trade] becomes a problem,” said Fox.
The majority of ban inquiries, he notes, have related to indices - particularly the Eurostoxx50 SX5E contract, a broad based index containing nine of the banned stocks. Hedge fund managers are unsure about whether their portfolios meet the required standards in order to be able to use that index in accordance with the various hedging exemptions.
Responding to that market need, US-based derivatives exchange OneChicago offered futures in the four country specific ETFs a week after the ban was implemented.
“We listed these products to provide an avenue for market participants to gain or adjust short delta exposure to equities in the countries that instituted the ban,” wrote Tom McCabe, COO of OneChicago.
“Our securities futures products were not subject to that ban, and in fact do not have any short delta restrictions,” he said.
Fox says that this kind of product, which replicates an index but without the banned stock, will be interesting to traders that typically use the Eurostoxx50 to go directionally short in the eurozone countries. The problem, he says, is whether liquidity will be there when a trader wants to exit the position.
Meanwhile, critics of such bans point out the inefficacy of the strategy in stabilising asset prices.
Before the short sale ban was even implemented, global securities lending flow data showed that the scale of short selling was dwarfed by the supply of shares to short and nowhere near the levels reach ahead of the last credit crisis in 2008, according to Data Explorers.
Moreover, the securities lending research firm states that there is little discernible pattern when comparing price changes in the week with levels of short interest for European large caps.
That, according to Data Explorers, reinforces the argument that the price drop in the first week of August, immediately after the US debt downgrade and about week before the short sale ban, had little do with short selling.
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