On 11 August 2011, the European Securities and Markets Authority (ESMA) announced that Belgium, France, Italy and Spain had implemented bans on short selling, to take effect on 12 August 2011. The bans follow a period of increased market volatility which have raised concerns for securities market regulators across the European Union. In a public statement issued by ESMA on 11 August, the European supervisory authority emphasised the requirements of the Market Abuse Directive (MAD), referring to the prohibition of the dissemination of information which gives, or is likely to give, false or misleading signals as to financial instruments, including the dissemination of rumours and false or misleading news. While ESMA acknowledges that short selling is a legitimate trading strategy, it says that when short selling is used in combination with spreading false market rumours, this is clearly abusive.
ESMA had coordinated discussions with the national regulators on the content and timing of any possible additional measures necessary to maintain orderly markets, but efforts to co-ordinate an EU-wide response were not successful. The bans introduced in Belgium, France, Italy and Spain apply to specific financial stocks and, in the case of France, Italy and Spain, will apply for fifteen days starting on 12 August 2011. The Belgian ban is to apply indefinitely. These measures follow bans imposed earlier in the week by Greece and Turkey. Similar prohibitions on short selling were introduced following the collapse of Lehman Brothers in 2008. Many of those prohibitions have been phased out, while countries such as the UK, France and Germany have adopted disclosure requirements requiring holders of significant short positions over a certain threshold to inform regulators. A ban on short selling of Irish bank shares was introduced on 18 September 2008 and continues in force.
Efforts to co-ordinate a pan-European approach to short selling lead to the publication of a formal legislative proposal on short selling by the European Commission in September 2010. Key features of the Commission’s relate to transparency and disclosure of positions, requiring “flagging” of short sales and disclosure of significant net short positions. The draft regulation proposes that increased powers be given to national regulators in exceptional situations to temporarily restrict or ban short selling in any financial instrument, subject to co-ordination by ESMA. If the price of a financial instrument falls by a significant amount in a day, national regulators will have the power to restrict short selling in that instrument until the end of the next trading day. ESMA will have the power, when certain conditions are fulfilled, to adopt temporary measures restricting or prohibiting short selling. The draft regulation also bans naked short selling, requiring an investor to have borrowed the instruments concerned, entered into an agreement to borrow them, or have an arrangement with a third party to locate and reserve them for lending so that they are delivered by the settlement date (at the latest four days after the transaction).
In July 2011, the European Parliament decided to postpone a final vote on the regulation until later this year, to allow further negotiations with the European Council as part of the co-decision procedure.
A copy of the Commission’s proposed regulation can be accessed through the following link: