EU toughens short-selling rules as markets hit by coronavirus
The European Union’s market watchdog is ramping up surveillance of hedge funds and other short sellers that may be taking advantage of the market rout caused by the coronavirus outbreak.
Short sellers place bets on shares that they expect to fall in price. They pay a fee to borrow shares in a company and then sell them in the hope of buying them back at a lower price and pocketing the profit.
Temporary measures announced by the European Securities and Markets Authority on Tuesday will force investors to reveal more information about their short-selling positions by halving the threshold for disclosures.
The ESMA said the measures were appropriate given that the severe stock market volatility posed a serious threat to market confidence in the EU as short selling can increase price swings and result in larger losses across financial markets.
There was widespread criticism of short sellers in the wake of the 2008 financial crisis, when certain investors were accused of deliberately undermining confidence in banking shares, fuelling global market instability.
The ESMA’s new rules – which also apply to the UK under the post-Brexit transition period – mean any short-selling position that accounts for 0.1% or more of a company’s outstanding shares must be announced to the market, compared with the previous threshold of 0.2%.
The measures, which come into force immediately and will last three months, have been prompted by severe stock market losses that have caused some of the biggest ever one-day falls for indexes such as the FTSE 100.
“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,” the ESMA said.
“The current circumstances constitute a serious threat to market confidence in the EU, and that the proposed measure is appropriate and proportionate to address the current threat level to EU financial markets,” it added.
The temporary measures stop short of bans imposed during both the 2011 eurozone credit crisis and the 2008 global financial crash. In 2008, the UK’s financial watchdog banned the shorting of 34 domestic stocks including major banks, asset managers and insurers for five months following the collapse of Lehman Brothers.
Last week, the UK’s Financial Conduct Authority banned short selling of 140 Italian and Spanish stocks after a historically turbulent week for international markets, but the curb only lasted 24 hours.
More drastic measures have been imposed in Asia, where South Korea has banned short selling for six months.
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