UK’s FCA “unlikely” to ban short selling
16 March 2020 London
Image: Shutterstock
The UK’s Financial Conduct Authority (FCA) is not expected to follow its Southern European and Asian counterparts in banning short selling to combat the on-going market sell-off caused by the global coronavirus pandemic.
Last week, the FCA fulfilled its responsibilities under the EU Short Selling Regulation to mimic the one-day short selling ban applied to a number of Italian and Spanish stocks that had been most affected by the virus’s disruption of the local economies.
Italy’s market regulator applied the breaks on trading of 85 stocks on Friday, while Spain’s Comisión Nacional del Mercado de Valores did the same for 69 stocks.
However, the FCA has so far stopped short of imposing a similar ban on any UK stocks and is unlikely to do so, according to Nick Bayley, managing director and head of Duff & Phelps’ compliance and regulatory consulting practice.
“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,” explains Bayley. “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.”
In Europe, most trading freezes have only been applied for short periods, usually only a day after a major price fall, and targetted at specific stocks.
In Asia, however, similar bans have been imposed much more liberally. Starting today, South Korea’s financial regulator has enacted a six-month ban on short selling in listed shares on the Kospi and Kosdaq.
The decision was made after Friday’s trading session saw significant volatility among equity markets most exposed the South Korean government’s attempts to curb the spread of the coronavirus and COVID-19, the potentially deadly disease it can cause.
The employment of bans on short selling around the world has stimulated debate around the effectiveness of such regulatory tools to steady markets during times of extreme volatility versus the potential side effects of distorting price discovery and creating an artificial environment to ensure price recovery.
Last week, the FCA fulfilled its responsibilities under the EU Short Selling Regulation to mimic the one-day short selling ban applied to a number of Italian and Spanish stocks that had been most affected by the virus’s disruption of the local economies.
Italy’s market regulator applied the breaks on trading of 85 stocks on Friday, while Spain’s Comisión Nacional del Mercado de Valores did the same for 69 stocks.
However, the FCA has so far stopped short of imposing a similar ban on any UK stocks and is unlikely to do so, according to Nick Bayley, managing director and head of Duff & Phelps’ compliance and regulatory consulting practice.
“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,” explains Bayley. “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.”
In Europe, most trading freezes have only been applied for short periods, usually only a day after a major price fall, and targetted at specific stocks.
In Asia, however, similar bans have been imposed much more liberally. Starting today, South Korea’s financial regulator has enacted a six-month ban on short selling in listed shares on the Kospi and Kosdaq.
The decision was made after Friday’s trading session saw significant volatility among equity markets most exposed the South Korean government’s attempts to curb the spread of the coronavirus and COVID-19, the potentially deadly disease it can cause.
The employment of bans on short selling around the world has stimulated debate around the effectiveness of such regulatory tools to steady markets during times of extreme volatility versus the potential side effects of distorting price discovery and creating an artificial environment to ensure price recovery.
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