Short selling bans and market restrictions – Considerations for investors

A number of regulators across the globe responded to recent market volatility by introducing temporary short selling bans and/or market restrictions. Such bans have since expired as of 18 May 2020. Other regulators (including the UK) said that there was no evidence to suggest that short selling had been the driver of recent market falls and emphasised the important role short selling plays in liquidity provision and price discovery, but in some cases nonetheless imposed lower thresholds for reporting short positions to ensure that regulators were able to monitor positions closely.

This alert reviews the steps taken by the various market regulators across the EU in response to market volatility

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.¹ This lowers the previous reporting threshold of 0.2%. The decision was originally in place until 16 June 2020 but was subsequently extended until 17 September 2020, then to 18 December 2020. In December 2020, ESMA announced a further extension to 19 March 2021. 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. In the United Kingdom ("UK"), holders of net short positions in shares traded on a UK trading venue are required to notify the Financial Conduct Authority (the "FCA") if the position reaches or exceeds 0.1% of the issued share capital.²

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 applied to all shares admitted to trading on the Vienna Stock Exchange and was originally in place only until 18 April 2020. On 15 April 2020, the FMA extended the ban to 18 May 2020. The ban included any transaction, which created, or related to, a financial instrument and where the effect or one of the effects of that transaction was 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 applied to both trading venues and OTC. However, the creation or increase of net short positions through indexed financial instruments or baskets of shares was excluded from the ban when the shares subject to the ban represented less than 50% of the composition of the index or basket. Transactions where there was a market making function were also 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 have constituted or increased a net short position on stocks admitted to trading on Belgian trading venues where FSMA was the relevant competent authority (being Euronext Brussels and Euronext Growth). The ban included any transaction, which created, or related to, a financial instrument and where the effect or one of the effects of that transaction was to confer a financial advantage in the event of a decrease in the price or value of another financial instrument. The ban applied 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 only applied to index-related instruments where relevant shares represented more than 20% of the index weight and did 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 applied 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 was the relevant competent authority. Convertible bonds and subscription rights were taken into account when calculating the net short position. Fixed income instruments or instruments that gave an exposure to the creditworthiness of any share issuers (such as credit default swap) were not taken into account; neither were financial instruments that were borrowed under a loan transaction. The decision permitted certain market making activities and hedging pre-existing long positions with pre-existing short positions as long as the net short position was not increased. It also permitted the creation of, or increase in, net short positions, which were 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 was not possible to create a new short position to hedge a pre-existing or new long position. Intra-day positions were also captured by the ban. Generally speaking, trades in index derivatives were 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 were excluded from the ban when the shares subject to the ban represented less than 50% of the composition of the index or basket.

Germany

The Federal Financial Supervisory Authority (the "BaFin") did not issue any restrictions on short selling and did not see any reason to do so. 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 at the time by certain other regulatory and market participants. BaFin has historically used short selling bans in only very limited circumstances. 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 covered short sales, certain aspects of credit default swaps and other similar transactions, which created or increased the net short position in shares admitted to trading on the regulated market of the Athens Stock Exchange where the HCMC was the relevant competent authority, irrespective of the venue where the transaction was executed. The temporary ban included sales of shares that were covered by subsequent intra-day purchases and all related instruments relevant for the calculation of net short positions. The ban applied to both trading venues and OTC. The ban only applied to index-related instruments where relevant shares represented more than 20% of the index weight and did 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 originally 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. However, the CONSOB announced an early termination of the ban on 18 May 2020, in order to align with the expiry of similar bans in Austria, Belgium, France, Greece and Spain. The prohibition included intra-day positions but did not apply to: (i) market making activities carried out by market makers included in the list published by ESMA; (ii) net short positions which were taken or increased exclusively to hedge subscription rights or equity components of convertible bonds previously purchased; or (iii) index-related instruments where relevant shares did 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 was the relevant competent authority (being the Spanish Stock Exchange and the Trading Alternative Market - MAB). On 15 April 2020, the CNMV extended the ban to 18 May 2020. The ban covered any transaction on shares or indexes, including cash transactions, derivatives (including OTC) and intra-day transactions. No exemption was available for transactions covered by share loan agreements. However, there were a few exemptions, including transactions undertaken by market makers; and short positions, which were hedged by an equivalent purchase of subscription rights.

United Kingdom

The FCA did not issue any restrictions on short selling. On 23 March 2020, the FCA said it would not ban short selling in the U.K. as there was "no evidence that short selling [had] 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 were in force

If you would like to discuss any of the above, please contact any of the authors or speak to a member of your White & Case team.

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

^{2 Notification is required in accordance with Article 5(2) of the Short Selling Regulation (as amended by the Short Selling (Notification Thresholds) Regulations 2021 No. 5}
 

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