Wirecard scandal: ESMA investigation of BaFin neglects short selling ban
16 July 2020 Paris
Image: gopixa/Shutterstock.com
The controversial short selling ban of Wirecard shares in 2019 will not be reviewed as part of the European Securities and Markets Authority's (ESMA) inquiry into the Germany market regulator’s actions in the lead up the fintech firm’s collapse.
In February last year, Germany’s BaFin requested ESMA’s endorsement of a two-month short selling ban on Wirecard shares. At the time, and since, BaFin claimed such action was essential to protect the payments processing giant from malicious hedge funds working in coordination with media outlets to bring it down.
BaFin also claimed that to let Wirecard suffer further losses than the 30 percent decline in share price it had already recorded earlier in the month would risk destabilising the DAX 30, Germany’s premier index, which the firm had joined in September 2018 by supplanting Commerzbank.
“At the time of our short selling ban, we observed a) big (and growing) net short positionings, b) significant losses in share price, c) high volatility and d) specific hints of the manipulation of share prices (via coordinated short selling attacks),” A BaFin spokesperson told SLT in late June.
A day after BaFin submitted its request ESMA issued a positive opinion on the ban, thereby expanding its remit to include all EU market participants. A negative opinion would have meant BaFin’s ban would only apply in Germany.
An ESMA spokesperson told SLT on 24 June that the authority made its decision based on the material provided by BaFin in support of their proposed short selling restriction.
“ESMA’s role in assessing requests under the Short Selling Regulation (SSR) is limited to assessing whether there is a risk to financial stability or market confidence and on the basis of the information available at that time provided by BaFin we concluded that this was the case,” the spokesperson explained.
It was also noted by the spokesperson that the SSR only allows ESMA a 24-hour window to respond and “does not require, or provide any powers to ESMA to conduct supervisory investigations into the underlying evidence supporting a short selling measure proposed by a national authority”.
It was the first ban of its kind to shield a single fintech firm from short sellers outside of a market crisis scenario. Previous bans had only been imposed on one or two individual struggling banks in southern European states, and only for single trading days at a time, not months.
As such, the ban has been widely criticised for representing a misuse of the SSR which is meant to help stabilise markets during extreme volatility, not protect individual firms accused of wrongdoing.
Today, the German regulator is facing an inquiry instigated by the European Commission and spearheaded by ESMA to assess the supervisory response in the financial reporting area by BaFin in the events leading to the collapse of Wirecard.
However, an ESMA spokesperson has confirmed to SLT that the short selling ban and the potential misuse of the SSR will not come under scrutiny in this instance.
Recital 32 under the SSR states that ESMA “should ensure that measures are taken by competent authorities only where necessary and proportionate”, while recital 34 limits such actions to “exceptional circumstances”.
So far, bar some peculiarities in the timings of new reports being published and short positions being executed, no evidence of foul play has been presented by any party, despite repeated accusations being levelled at certain hedge funds and media outlets by both Wirecard and BaFin.
In the wake of revelations that Wirecard senior management may have cooked the books to the tune of nearly €2 billion, along with the resignation and arrest of its then CEO Markus Braun, BaFin and ESMA declined requests by this magazine to release the evidence of the short seller conspiracy that underpinned the short selling ban.
Without such evidence, it is impossible to conclude whether the events in February 2018 could be defined as “extraordinary” or were in fact the unfortunately too familiar scenario of a fraudulent firm facing the negative consequences of being unmasked.
What will ESMA’s inquiry look into?
Instead of the ban, ESMA will focus on the application of the Guidelines on the Enforcement of Financial Information (GLEFI) by BaFin and the Financial Reporting Enforcement Panel, the designated competent authorities for the supervision and enforcement of financial information in the Federal Republic of Germany under the Transparency Directive (TD).
The fast-track assessment will be conducted using GLEFI and ESMA’s Peer Review Methodology. It is expected to be completed by 30 October.
The peer review tool has been chosen as the TD only contains high-level principles regarding financial reporting and its supervision, and the IAS Regulation is not included in the list of acts for which ESMA may launch a Breach of Union Law investigation.
In a statement on the fact-finding mission, ESMA says: “High-quality financial reporting is core to investor trust in capital markets and Wirecard’s collapse has undermined this trust.
“Therefore, it is necessary to assess these events to help in restoring investor confidence.”
The full account of ESMA, BaFin and the EU Commission’s actions and opinions related to the short selling ban at the time and now can we read, here.
In February last year, Germany’s BaFin requested ESMA’s endorsement of a two-month short selling ban on Wirecard shares. At the time, and since, BaFin claimed such action was essential to protect the payments processing giant from malicious hedge funds working in coordination with media outlets to bring it down.
BaFin also claimed that to let Wirecard suffer further losses than the 30 percent decline in share price it had already recorded earlier in the month would risk destabilising the DAX 30, Germany’s premier index, which the firm had joined in September 2018 by supplanting Commerzbank.
“At the time of our short selling ban, we observed a) big (and growing) net short positionings, b) significant losses in share price, c) high volatility and d) specific hints of the manipulation of share prices (via coordinated short selling attacks),” A BaFin spokesperson told SLT in late June.
A day after BaFin submitted its request ESMA issued a positive opinion on the ban, thereby expanding its remit to include all EU market participants. A negative opinion would have meant BaFin’s ban would only apply in Germany.
An ESMA spokesperson told SLT on 24 June that the authority made its decision based on the material provided by BaFin in support of their proposed short selling restriction.
“ESMA’s role in assessing requests under the Short Selling Regulation (SSR) is limited to assessing whether there is a risk to financial stability or market confidence and on the basis of the information available at that time provided by BaFin we concluded that this was the case,” the spokesperson explained.
It was also noted by the spokesperson that the SSR only allows ESMA a 24-hour window to respond and “does not require, or provide any powers to ESMA to conduct supervisory investigations into the underlying evidence supporting a short selling measure proposed by a national authority”.
It was the first ban of its kind to shield a single fintech firm from short sellers outside of a market crisis scenario. Previous bans had only been imposed on one or two individual struggling banks in southern European states, and only for single trading days at a time, not months.
As such, the ban has been widely criticised for representing a misuse of the SSR which is meant to help stabilise markets during extreme volatility, not protect individual firms accused of wrongdoing.
Today, the German regulator is facing an inquiry instigated by the European Commission and spearheaded by ESMA to assess the supervisory response in the financial reporting area by BaFin in the events leading to the collapse of Wirecard.
However, an ESMA spokesperson has confirmed to SLT that the short selling ban and the potential misuse of the SSR will not come under scrutiny in this instance.
Recital 32 under the SSR states that ESMA “should ensure that measures are taken by competent authorities only where necessary and proportionate”, while recital 34 limits such actions to “exceptional circumstances”.
So far, bar some peculiarities in the timings of new reports being published and short positions being executed, no evidence of foul play has been presented by any party, despite repeated accusations being levelled at certain hedge funds and media outlets by both Wirecard and BaFin.
In the wake of revelations that Wirecard senior management may have cooked the books to the tune of nearly €2 billion, along with the resignation and arrest of its then CEO Markus Braun, BaFin and ESMA declined requests by this magazine to release the evidence of the short seller conspiracy that underpinned the short selling ban.
Without such evidence, it is impossible to conclude whether the events in February 2018 could be defined as “extraordinary” or were in fact the unfortunately too familiar scenario of a fraudulent firm facing the negative consequences of being unmasked.
What will ESMA’s inquiry look into?
Instead of the ban, ESMA will focus on the application of the Guidelines on the Enforcement of Financial Information (GLEFI) by BaFin and the Financial Reporting Enforcement Panel, the designated competent authorities for the supervision and enforcement of financial information in the Federal Republic of Germany under the Transparency Directive (TD).
The fast-track assessment will be conducted using GLEFI and ESMA’s Peer Review Methodology. It is expected to be completed by 30 October.
The peer review tool has been chosen as the TD only contains high-level principles regarding financial reporting and its supervision, and the IAS Regulation is not included in the list of acts for which ESMA may launch a Breach of Union Law investigation.
In a statement on the fact-finding mission, ESMA says: “High-quality financial reporting is core to investor trust in capital markets and Wirecard’s collapse has undermined this trust.
“Therefore, it is necessary to assess these events to help in restoring investor confidence.”
The full account of ESMA, BaFin and the EU Commission’s actions and opinions related to the short selling ban at the time and now can we read, here.
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