Coronavirus and short-selling restrictions on European shares

European national regulators issue temporary short-selling restrictions on European shares

On Friday 13 March 2020, various European national regulators issued temporary short-selling restrictions on European shares. The restrictions were for the trading day 13 March 2020 only.

The restrictions issued by the FCA covered (mainly) Italian shares of companies across all industries (in other words, the shares were not limited to financial services or banking shares). Our best guess is that these restrictions were issued due to extreme market volatility (particularly in futures and pre-opening auction trading) as a result of market reactions to central banks’ and governments’ decisions in relation to the COVID-19 pandemic and, in particular, the potential economic impact to Italian companies of the national lock down.

Although regulators have the ability to roll-over these restrictions.

Late Monday 16 March 2020, Spain’s CNMV banned transactions with Spanish shares involving the creation and increase in net short positions for a month starting on Tuesday 21 March 2020. The prohibition, which is extendable, covers short-selling even when such deals are covered by a securities loan, it said.

Italy’s Consob introduced a new 24-hour short-selling ban at the same time as the Borsa Italiana continued to slide, and kicked off a procedure that will allow it to adopt further restrictive measures, including a more lasting ban on short-selling if needed. The ban will apply to 20 stocks on Tuesday and follows a similar measure taken by Consob on 85 stocks on 13 March 2020.

Also on Monday 16 March 2020, ESMA (the pan-European securities regulator-of-regulators) issued a decision here “temporarily requiring the holders of net short positions in shares traded on a European Union (EU) regulated market to notify the relevant national competent authority (NCA)” of its short positions at a lower threshold than normal.

The UK’s FCA has not (yet) released a similar decision, but it is likely to do so.

There are three points of note:

• The Friday 13 March short selling ban only covers dealing in the shares themselves – derivative contracts (such as futures) are not covered;
• The Monday 16 March decision covers the situation where dealings in shares and/or derivative contracts could lead to a firm having a net short position in the underlying share; and
• In the past when these bans have been put into force, generally they have been said by regulators to seek to protect a nation’s large financial institutions from attack by malicious third parties which seek to create an artificial negative outlook for the company for their own (possibly unlawful) benefit – it does not appear that the ESMA decision today was taken for that reason.

The broad notification requirement is because it is possible to short a company’s share price by trading financial instruments other than its shares and it is possible to seek to create an artificial negative market for a company’s shares from taking a short position (and benefit from it).

Most modern electronic markets have automatic limit up/limit down trading halts. This means that if the price for a financial instrument rises or falls precipitously over a short period of time, the market for that financial instrument is suspended automatically for a short period.

Taking a significant short position in a company theoretically could (a) trigger a trading halt or (b) lead to a disorderly market for the instruments. In a global market which looks increasingly likely to remain extremely volatile for an extended period, regulators will be concerned to:

• reduce factors which could increase the likelihood or impact of a disorderly market and which were artificial or manufactured; and
• increase regulators’ knowledge of who owns what so they feel confident they will receive early warning signs that a company or market has an underlying, fundamental issue rather than it being a target for (possibly unlawful) speculative activity.

We should expect an increasing use of regulators’ powers to maintain market orderliness (so far as they can do so) in the next months