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Europe renews short selling restrictions

On 16 September, the European Securities and Markets Authority (ESMA) and the EFTA Surveillance Authority renewed the requirement on hedge funds and other short sellers of stocks to report to member state regulators (National Competent Authorities or NCAs) where their positions exceed 0.1 per cent of the share capital of an issuer listed on an EU regulated market.

Reporting occurs under the provisions of Article 28(1) of Regulation (EU) No 236/2012 of the European Parliament and of the Council (the Short Selling Regulation). The new decision applies from 18 September 2020, for a period of three months – expiring on current timings on 18 December 2020.

The context of the renewal is, of course, the COVID-19 pandemic and fears within Brussels of a possible second wave of the virus heading into the winter months.

The reporting requirement for notifications under the Short Selling Regulation was previously 0.2 per cent of share capital but this was initially lowered to 0.1 per cent in March 2020 during the first wave of the pandemic and increased market volatility across the continent.

To ban or to disclose?

Alongside EU/EFTA developments noted above, various NCAs – and a host of third countries – have gone further and introduced bans on short selling various key stocks as a result of anticipated market stress due to coronavirus. To give a sense of perspective, the last time short selling restrictions were under the spotlight in this way by regulators was in 2008 after the Lehman crash.

Not all are convinced that measures curbing short selling are effective though, the World Federation of Exchanges has been especially vocal criticising bans as interfering with price formation and liquidity. The EU’s approach of ensuring market transparency, as opposed to outright prohibition, seems to be the happy medium for present times.

ESMA’s decision can be found here.

ESMA’s press release can be found here.

EFTA Surveillance Authority’s press release can be found here.