European regulators enforce short-selling bans to stabilise markets

Authorities in Spain, Italy, France and the UK have all enforced bans on creating or increasing short positions on some securities in response to significant declines across Europe’s equities markets.

By Jonathan Watkins

Financial regulators across Europe have made moves to temporarily restrict short selling of certain stocks for the second time in less than a week, as the coronavirus pandemic continues to grip markets.

Responding to recent and significant declines across Europe’s equities markets, authorities in Spain, Italy, France and the UK have all enforced bans on creating or increasing short positions on some securities.

The Autorité des Marchés Financiers in France, Financial Conduct Authority in the UK, and Italy’s Commissione Nazionale per le Società e la Borsa, have all taken action today to impose one-day bans on short selling of European stocks most impacted by the recent market declines.

Spain’s Comisión Nacional del Mercado de Valores has decided to ban short selling activity on Spanish shares for up to one month from today. The ban can be extended if needed, but may also be lifted before the one-month deadline.

Meanwhile the European Securities and Markets Authority (ESMA) has demanded more information from hedge funds betting against stocks, by lowering the threshold at which investors must report to national regulators on short selling positions.

ESMA said that lowering the reporting threshold is a “precautionary action that, under the exceptional circumstances linked to the ongoing COVID-19 pandemic, is essential for authorities to monitor developments in markets.”

Short-sellers borrow shares and immediately sell them, betting the price will fall before they buy back the shares and return them to the lender, pocketing the margin. In 2008 during the global financial crisis, regulators globally made similar moves to ban short selling of stocks, due to fears the trading strategy would exacerbate the steep drop in stock prices

Yesterday, Global Custodian reported that UniSuper, one of Australia’s largest superannuation fund with AU$85 billion in assets under management, had instructed BNP Paribas Securities Services to suspend its securities lending programme. UniSuper said the decision is aimed at curtailing the amount of short selling that has been sparked by the pandemic.

The rare interference from national regulators has been met with expected criticism, for many point to the benefits of the practice.

In a post on LinkedIn, securities finance expert, Roy Zimmerhansl – now practice lead at PierPoint Financial Consulting, wrote: “Improved liquidity and price discovery are important contributions from short sellers, but crucially, short selling acts as a counterbalance against ‘irrational exuberance’.”

“Did short sellers cause the downturn or was it the combo of coronavirus impact, an oil dispute between Russia and Saudi Arabia coming on top of a historic bull run? Will banning short selling stop markets falling? I don’t know whether prices will bounce or fall but where short selling has already been banned, prices briefly rose before falling again. Permitted short selling volumes have probably fallen and if prices continue to go downhill, it is likely caused by long investors de-risking portfolios.”