German industry body fires back against calls for EU-wide short selling ban
23 March 2020 Berlin
Image: Shutterstock
An argument around the effectiveness of short selling bans has erupted in Europe after several market regulators imposed lengthy lockdowns last week.
Market regulators in France, Belgium, Austria
, Greece and Spain signed-off on one-month bans on traders engaging in traditional and synthetic shorts, as well as credit default swaps, in response to heavy losses in local markets driven by the on-going COVID-19 pandemic.
Italy went further and opted for a three-month ban.
So far, all EU market regulators imposing a ban have only shutdown traders' ability to engage in new short positions or building on existing positions. They are not demanding active positions be unwound as this would likely cause a price spike and liquidity squeeze.
The European Securities and Markets Authority (ESMA) was quick to endorse the bans as a way of reducing the downward pressure on equities hardest hit by the biggest sell-off since the 2008 financial crisis.
Notably, the UK has so far not followed suit
and the Financial Conduct Authority has only fulfilled its obligations under the EU Short Selling Regulation to mirror bans on specific shares as required by its counterparts on the continent.
Now, calls are increasing for ESMA to invoke emergency powers to instigate an EU-wide ban.
Advocates have come from several quarters including the German Finance Ministry, the Austrian markets watchdog and senior EU officials.
Markus Ferber, a senior member of the European Parliament, last week argued that “such a ban should be introduced on a European level and in a coordinated way in order to avoid market fragmentation and regulatory arbitrage”.
Elsewhere, executive directors of Austria’s markets authority, Helmut Ettl and Eduard Müller, state: “Speculative short selling may lead to significant risks in the currently exceptionally volatile global and Austrian market environment.
“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.
However, the German investment funds association BVI has fired back against the spate of shorting lockdowns across Europe, saying it “firmly opposed” a general ban on short selling in the EU.
“A general pan-EU ban on short selling for securities traded in the EU only makes sense selectively for certain companies and sectors and even then its effectiveness is doubtful,” says BVI CEO Thomas Richter.
“Already today, national supervisory authorities could issue temporary short selling bans in individual cases if they consider market integrity or market confidence to be threatened. But the current fall in stock market prices has fundamental causes,” he adds.
Richter further emphasis that “covered short selling is not speculation”.
Elsewhere, Nick Bayley, managing director and head of Duff & Phelps’ compliance and regulatory consulting practice, warns that the short selling bans imposed during the global financial crisis led to “significant price dislocations and confusion in the market”.
Moreover, concerns have been raised that the bans will delay investors expressing their sentiment towards struggling equities and shorting activities will spike again once they are lifted.
Regulators appear to be betting that once the worst of the pandemic is over and markets stabilise the impetus to short many sectors will go with it.
Speaking to SLT early last week, Roy Zimmerhansl, founder and practice lead of Pierpoint Financial Consulting, explained that the bans are unlikely to stop markets falling further, adding that where short selling has already been banned, prices had a temporary respite and then continued to fall.
“This mirrors the experience of the past,” he noted.
In addition to liquidity and price discovery concerns, Zimmerhansl explains that, unless the situation improves before the ban is lifted, “it is likely to create a catastrophic drop in price”.
“Or maybe short selling should be banned forever and people should accept that what they really want is not a market with all available information, rather one that is structurally upward biased?” he adds. “If markets continue to go downhill, it is more likely to be caused by long investors de-risking their portfolios.”
“Want to make a contribution to price stability? How about we ask long investors to stop selling their portfolios – why not put a ban on long selling for a day, a week, a month or six months? Or is it just easier to target short sellers?”
An ESMA spokersperson tells SLT that nothing was being taken off the table and the authority was in constant discussion with the European Commission and and national regulators about the need for further action to steady markets.
Austria’s FMA notes that despite its preference for ESMA to lead a coordinated effort across the EU, member states had not been able to reach an agreement to date as their respective national financial markets are currently affected to differing extents by the coronavirus crisis.
This was further highlighted by Germany's market regulator firmly coming out against the idea of a short selling ban last week.
Market regulators in France, Belgium, Austria
, Greece and Spain signed-off on one-month bans on traders engaging in traditional and synthetic shorts, as well as credit default swaps, in response to heavy losses in local markets driven by the on-going COVID-19 pandemic.
Italy went further and opted for a three-month ban.
So far, all EU market regulators imposing a ban have only shutdown traders' ability to engage in new short positions or building on existing positions. They are not demanding active positions be unwound as this would likely cause a price spike and liquidity squeeze.
The European Securities and Markets Authority (ESMA) was quick to endorse the bans as a way of reducing the downward pressure on equities hardest hit by the biggest sell-off since the 2008 financial crisis.
Notably, the UK has so far not followed suit
and the Financial Conduct Authority has only fulfilled its obligations under the EU Short Selling Regulation to mirror bans on specific shares as required by its counterparts on the continent.
Now, calls are increasing for ESMA to invoke emergency powers to instigate an EU-wide ban.
Advocates have come from several quarters including the German Finance Ministry, the Austrian markets watchdog and senior EU officials.
Markus Ferber, a senior member of the European Parliament, last week argued that “such a ban should be introduced on a European level and in a coordinated way in order to avoid market fragmentation and regulatory arbitrage”.
Elsewhere, executive directors of Austria’s markets authority, Helmut Ettl and Eduard Müller, state: “Speculative short selling may lead to significant risks in the currently exceptionally volatile global and Austrian market environment.
“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.
However, the German investment funds association BVI has fired back against the spate of shorting lockdowns across Europe, saying it “firmly opposed” a general ban on short selling in the EU.
“A general pan-EU ban on short selling for securities traded in the EU only makes sense selectively for certain companies and sectors and even then its effectiveness is doubtful,” says BVI CEO Thomas Richter.
“Already today, national supervisory authorities could issue temporary short selling bans in individual cases if they consider market integrity or market confidence to be threatened. But the current fall in stock market prices has fundamental causes,” he adds.
Richter further emphasis that “covered short selling is not speculation”.
Elsewhere, Nick Bayley, managing director and head of Duff & Phelps’ compliance and regulatory consulting practice, warns that the short selling bans imposed during the global financial crisis led to “significant price dislocations and confusion in the market”.
Moreover, concerns have been raised that the bans will delay investors expressing their sentiment towards struggling equities and shorting activities will spike again once they are lifted.
Regulators appear to be betting that once the worst of the pandemic is over and markets stabilise the impetus to short many sectors will go with it.
Speaking to SLT early last week, Roy Zimmerhansl, founder and practice lead of Pierpoint Financial Consulting, explained that the bans are unlikely to stop markets falling further, adding that where short selling has already been banned, prices had a temporary respite and then continued to fall.
“This mirrors the experience of the past,” he noted.
In addition to liquidity and price discovery concerns, Zimmerhansl explains that, unless the situation improves before the ban is lifted, “it is likely to create a catastrophic drop in price”.
“Or maybe short selling should be banned forever and people should accept that what they really want is not a market with all available information, rather one that is structurally upward biased?” he adds. “If markets continue to go downhill, it is more likely to be caused by long investors de-risking their portfolios.”
“Want to make a contribution to price stability? How about we ask long investors to stop selling their portfolios – why not put a ban on long selling for a day, a week, a month or six months? Or is it just easier to target short sellers?”
An ESMA spokersperson tells SLT that nothing was being taken off the table and the authority was in constant discussion with the European Commission and and national regulators about the need for further action to steady markets.
Austria’s FMA notes that despite its preference for ESMA to lead a coordinated effort across the EU, member states had not been able to reach an agreement to date as their respective national financial markets are currently affected to differing extents by the coronavirus crisis.
This was further highlighted by Germany's market regulator firmly coming out against the idea of a short selling ban last week.
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