Europe cured of short selling bans
18 May 2020 Paris
Image: MarianWeyo/Shutterstock.com
The national regulators of France, Greece, Spain, Austria and Belgium have unilaterally decided to not renew their respective short selling bans, due to expire at midnight tonight.
Meanwhile, Italy’s CONSOB had originally intended to maintain its restriction on shorting until 18 June but will now terminate it early to align with other European markets.
The restrictions on the opening of new short positions were a symptom of COVID-19-inspired market turmoil that saw the regulators scramble to pull their equities markets out of free-fall in early March.
The decision not to renew means that, as of 19 May, the EU will be free of short selling bans for the first time since 13 March, when Spain enacted a one-day ban in response to increased market volatility brought on by the disease’s spread through the continent.
The spate of short-term bans in Italy, France and Spain in March was later extended to month-long prohibitions on new short positions being taken as the pandemic took hold.
Italy, which is among the countries worst affected by the coronavirus both socially and economically, opted for a three-month ban.
The curbs on short selling prompted a major backlash from several corners of the financial world including the International Securities Lending Association's Council for Sustainable Finance, the World Federation of Exchanges (WFE), and the German investment funds association, among several others.
The consortium of critics stated that such bans were proven to distort price discovery and undermine market liquidity.
A less likely ally for short sellers was the UK’s Financial Conduct Authority (FCA) which not only refused to follow suit with its continental counterparts but issued a rebuttal to the idea that such bans are an appropriate action during periods of market turmoil.
The FCA said in March that its research into the consequences of the bans imposed by itself and others during the height of the 2008 financial crisis showed it did more harm than good in the long run.
Despite the widespread criticism, all the national regulators that laid down bans in March chose to renew them for a further month in April.
Now, however, the calmer market conditions in recent weeks mean the restrictions are no longer deemed necessary.
WFE was among the first to celebrate the regulators’ decision. In a statement, WFE says it welcomes the decision to end the short selling bans across Europe and “commends authorities’ efforts to return to normal operations of fair and orderly markets in the region”.
Elsewhere, ISLA CEO Andrew Dyson also hailed the return to normality.
"As markets have returned to something of normal reality, it is encouraging to see that regulators across Europe feel there is no immediate need to extend these bans further," Dyson tells SLT. "Whilst the effectiveness of short selling bans continues to spark debate, there is no doubt that by allowing investors to engage more broadly in short selling activity, an important part of market liquidity will have returned to those markets subject to these bans."
The European Securities and Market Authority (ESMA), which has been stuck in the middle of the row, opted to endorse the individual market bans but resisted calls from the EU’s political sphere to enact emergency powers to place an EU-wide blanket ban on shorting.
Elsewhere, the EU securities market watchdog did take steps to lower the disclosure threshold for net short positions from 0.2 percent to 0.1 percent on 16 March, in a move aimed at increasing market transparency.
The measure will remain in place until 16 June when the need for its renewal will be reviewed.
ESMA has acknowledged the regulators’ latest decision not to renew.
Meanwhile, Italy’s CONSOB had originally intended to maintain its restriction on shorting until 18 June but will now terminate it early to align with other European markets.
The restrictions on the opening of new short positions were a symptom of COVID-19-inspired market turmoil that saw the regulators scramble to pull their equities markets out of free-fall in early March.
The decision not to renew means that, as of 19 May, the EU will be free of short selling bans for the first time since 13 March, when Spain enacted a one-day ban in response to increased market volatility brought on by the disease’s spread through the continent.
The spate of short-term bans in Italy, France and Spain in March was later extended to month-long prohibitions on new short positions being taken as the pandemic took hold.
Italy, which is among the countries worst affected by the coronavirus both socially and economically, opted for a three-month ban.
The curbs on short selling prompted a major backlash from several corners of the financial world including the International Securities Lending Association's Council for Sustainable Finance, the World Federation of Exchanges (WFE), and the German investment funds association, among several others.
The consortium of critics stated that such bans were proven to distort price discovery and undermine market liquidity.
A less likely ally for short sellers was the UK’s Financial Conduct Authority (FCA) which not only refused to follow suit with its continental counterparts but issued a rebuttal to the idea that such bans are an appropriate action during periods of market turmoil.
The FCA said in March that its research into the consequences of the bans imposed by itself and others during the height of the 2008 financial crisis showed it did more harm than good in the long run.
Despite the widespread criticism, all the national regulators that laid down bans in March chose to renew them for a further month in April.
Now, however, the calmer market conditions in recent weeks mean the restrictions are no longer deemed necessary.
WFE was among the first to celebrate the regulators’ decision. In a statement, WFE says it welcomes the decision to end the short selling bans across Europe and “commends authorities’ efforts to return to normal operations of fair and orderly markets in the region”.
Elsewhere, ISLA CEO Andrew Dyson also hailed the return to normality.
"As markets have returned to something of normal reality, it is encouraging to see that regulators across Europe feel there is no immediate need to extend these bans further," Dyson tells SLT. "Whilst the effectiveness of short selling bans continues to spark debate, there is no doubt that by allowing investors to engage more broadly in short selling activity, an important part of market liquidity will have returned to those markets subject to these bans."
The European Securities and Market Authority (ESMA), which has been stuck in the middle of the row, opted to endorse the individual market bans but resisted calls from the EU’s political sphere to enact emergency powers to place an EU-wide blanket ban on shorting.
Elsewhere, the EU securities market watchdog did take steps to lower the disclosure threshold for net short positions from 0.2 percent to 0.1 percent on 16 March, in a move aimed at increasing market transparency.
The measure will remain in place until 16 June when the need for its renewal will be reviewed.
ESMA has acknowledged the regulators’ latest decision not to renew.
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