Short selling bans and market restrictions – Considerations for investors

White & Case LLPA number of regulators across the globe have responded to recent market volatility by introducing temporary short selling bans and/or market restrictions. Other regulators (including the UK) say that there is no evidence to suggest that short selling has been the driver of recent market falls and emphasise the important role short selling plays in liquidity provision and price discovery, but in some cases have nonetheless imposed lower thresholds for reporting short positions to ensure that regulators are able to monitor positions closely.

This alert reviews certain key market developments, which investors should be aware of when trading on regulated markets across the EU.

Disclosure required by ESMA

On 16 March 2020, the European Securities and Markets Authority (the "ESMA") issued a decision to temporarily require the holders of net short positions in shares traded on an EU regulated market to notify the relevant national competent authority if the position reaches or exceeds 0.1% of the issued share capital. The decision applies for the next three months (until 16 June 2020)1 and lowers the previous reporting threshold of 0.2%. The decision does not apply to shares admitted to trading on a regulated market where the principal venue for the trading of the shares is located in a third country, market making or stabilisation activities.

Who is captured by the legislation?

Natural or legal persons, irrespective of their country of residence, who hold net short positions in relation to the issued share capital of companies whose shares are admitted to trading on a regulated EU market. EU regulations will continue to apply in the United Kingdom until the end of the Brexit transition period on 31 December 2020.

Approach by jurisdiction

Austria

On 18 March 2020, the Austrian financial markets regulator (the "FMA") banned short selling on the Vienna Stock Exchange for one month, in efforts to shield the equities market from volatility. The ban applies to all shares admitted to trading on the Vienna Stock Exchange and was originally in place until 18 April 2020. On 15 April 2020, the FMA extended the ban to 18 May 2020. The ban includes any transaction, which creates, or relates to, a financial instrument and where the effect or one of the effects of that transaction is to confer a financial advantage in the event of a decrease in the price or value of one or several financial instruments covered by the ban. The ban applies to both trading venues and OTC. However, the creation or increase of net short positions through indexed financial instruments or baskets of shares are excluded from the ban when the shares subject to the ban represent less than 50% of the composition of the index or basket. Transactions where there is a market making function are excluded from the ban.

Belgium

On 16 March 2020, the Financial Services and Markets Authority (the "FSMA") issued a one-day ban on short selling in shares of 17 stocks on Euronext Brussels. The FSMA issued a subsequent decision on 17 March 2020 (updated on 19 March 2020), which prohibited entering into a short sale, which might constitute or increase a net short position on stocks admitted to trading on Belgian trading venues where the FSMA is the relevant competent authority (being Euronext Brussels and Euronext Growth). The ban includes any transaction, which creates, or relates to, a financial instrument and where the effect or one of the effects of that transaction is to confer a financial advantage in the event of a decrease in the price or value of another financial instrument. The ban applies to both trading venues and OTC and was originally in place until 17 April 2020. On 15 April 2020, the FSMA extended the ban to 18 May 2020. The ban will only apply to index-related instruments where relevant shares represent more than 20% of the index weight and will not apply to market making activities.

France

On 16 March 2020, the Financial Markets Regulatory of France (the "AMF") issued a one-day ban on all short selling activities for 92 stocks. The ban related to all short selling activities but did not apply to net short positions. On 18 March 2020, the AMF issued a subsequent decision, which banned the creation or increase of new net short positions for the next twenty trading days. The AMF first extended this ban by ten days, until 16 April 2020. On 15 April 2020, the AMF announced a further extension to 18 May 2020. The prohibition applies to shares (and related instruments such as saving/preferred shares, derivatives, depository receipts and index-related instruments) admitted to trading on a French trading venue where the AMF is the relevant competent authority. Convertible bonds and subscription rights will be taken into account when calculating the net short position. Fixed income instruments or instruments that give an exposure to the creditworthiness of any share issuers (such as credit default swap) shall not to be taken into account; neither will financial instruments that were borrowed under a loan transaction. The decision permits certain market making activities and hedging a pre-existing long position with a pre-existing short position as long as the net short position is not increased. It also permits the creation of, or increase in, net short positions, which are aimed exclusively at covering the risks stemming from either the equity component of a (previously purchased) convertible bond or a (previously purchased) subscription right over new shares. It is not possible to create a new short position to hedge a pre-existing or new long position and intra-day positions are captured by the ban. Generally speaking, trades in index derivatives should be taken into account when computing the net position on each share affected by the ban. However, the creation or increase of net short positions through indexed financial instruments or baskets of shares are excluded from the ban when the shares subject to the ban represent less than 50% of the composition of the index or basket.

Germany

The Federal Financial Supervisory Authority (the "BaFin") has not yet issued any restrictions on short selling, and currently does not see any reason to do so. In this regard, on 20 March 2020, the German investment funds association, BVI, issued a press release publicly opposing a general ban on short selling in the EU, despite such ban being demanded by certain other regulatory and market participants. BaFin has used short selling bans in only very limited circumstances historically. In February 2019, BaFin implemented, for the first time, a temporary ban on net short positions in shares of an individual company (Wirecard AG) for a period of two months, as BaFin suspected market manipulation in relation to the share price of Wirecard shares.

Greece

On 18 March 2020, the Hellenic Capital Market Commission (the "HCMC") banned short selling on the Athens Stock Exchange originally until 24 April 2020. On 15 April 2020, the HCMC extended the ban to 18 May 2020. The ban covers short sales, certain aspects of credit default swaps and other similar transactions, which create or increase the net short position in shares admitted to trading on the regulated market of the Athens Stock Exchange where the HCMC is the relevant competent authority, irrespective of the venue where the transaction is executed. The temporary ban includes sales of shares that are covered by subsequent intra-day purchases and all related instruments relevant for the calculation of net short positions. The ban applies to both trading venues and OTC. The ban only applies to index-related instruments where relevant shares represent more than 20% of the index weight and will not apply to market making activities.

Italy

On 12 March 2020, the Commissione Nazionale per le Società e la Borsa (the "CONSOB") issued a one-day ban (effective on 13 March 2020) on short sales backed by stock lending in 85 companies listed on the Milan Stock Exchange. On 17 March 2020, the CONSOB issued a new ban prohibiting for three months, from 18 March 2020 until 18 June 2020, any natural or legal person, irrespective of their country of residence, to take net short positions or to increase existing net short positions in shares admitted to trading on the Milan Stock Exchange. The prohibition includes intra-day positions. However, the prohibition will not apply to (i) market making activities carried out by market makers included in the list published by ESMA; (ii) net short positions which are taken or increased exclusively to hedge subscription rights or equity components of convertible bonds previously purchased; or (iii) index-related instruments where relevant shares do not represent more than 20% of the index weight.

Spain

The Comisión Nacional del Mercado de Valores (the "CNMV") banned short sales for the trading session on 13 March 2020. On 17 March 2020, the CNMV implemented a temporary ban of one month (until 17 April 2020) on any increase of net short positions in shares admitted to trading on a Spanish trading venue where the CNMV is the relevant competent authority (being the Spanish Stock Exchange and the Trading Alternative Market - MAB). On 15 April 2020, the CNMV decided to extend the ban to 18 May 2020 and which could be further extended for subsequent periods of up to 3 months. The ban covers any transaction on shares or indexes, including cash transactions, derivatives (including OTC) and intra-day transactions. No exemption is available for transactions covered by share loan agreements. However, there are a few exemptions, including transactions undertaken by market makers; and short positions, which are hedged by an equivalent purchase of subscription rights.

United Kingdom

On 23 March 2020, the Financial Conduct Authority (the "FCA") said it will not ban short selling in the U.K. as there is "no evidence that short selling has been the driver of recent market falls", despite temporary restrictions being imposed by other European regulators.

The FCA went further to say that "[a]ggregate net short selling activity reported to FCA is low as a percentage of total market activity and has decreased in recent days" and that "[s]hort selling is a critical underpinning of liquidity provision ... The loss of these benefits would need to be carefully balanced before determining that any intervention to prevent short selling was appropriate."

Countries where bans are currently in force

 

Expiry of ban

Specified exemptions

Austria

18 May 2020

Index-related instruments where relevant shares comprise less than 50% of index weight

Market making activities pursuant to Article 17 of the Regulation (EU) No 236/2012 (the "SSR")

Belgium

18 May 2020

Index-related instruments where relevant shares comprise less than 20% of index weight

Market making activities pursuant to Article 17 of the SSR

France

18 May 2020

Index-related instruments where relevant shares comprise less than 50% of index weight

Market making activities pursuant to Article 17 of the SSR

Hedging a pre-existing long position with a pre-existing short position as long as the net short position is not increased

Fixed income instruments or instruments that give an exposure to the creditworthiness of any share issuers (such as credit default swaps)

Creation of, or increase in, net short positions when the investor who acquires a convertible bond has a delta-neutral position between the equity component of the convertible bond and the short position taken to cover that component

Creation of, or increase in, net short positions where it is hedged by a purchase that is equivalent in terms of proportion on subscription rights

Financial instruments that were borrowed under a loan transaction

Greece

18 May 2020

Index-related instruments where relevant shares comprise less than 20% of index weight

Market making activities pursuant to Article 17 of the SSR

Italy

18 June 2020

Index-related instruments where relevant shares do not comprise more than 20% of index weight

Market making activities pursuant to Article 17 of the SSR

Net short positions which are created or increased exclusively to hedge subscription rights or equity components of convertible bonds previously purchased

Spain

18 May 2020

Index-related instruments (including derivatives over index-related instruments) where relevant shares comprise less than 50% of index weight

Market making activities pursuant to Article 17 of the SSR

Creation of, or increase in, net short positions where it is hedged by a purchase that is equivalent in terms of proportion on subscription rights

1 Notification is required in accordance with point (a) of Article 28(1) of the Short Selling Regulation (ESMA70-155-9546)

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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