March 16, 2020 / 11:11 AM / 2 months ago

EU tightens short-selling rules amid coronavirus rout

LONDON/PARIS (Reuters) - Hedge funds and other investors will have to give regulators more information about the bets they are taking, the European Union’s markets watchdog announced on Monday, warning that a markets slump triggered by the coronavirus could last weeks.

The European Securities and Markets Authority (ESMA) said it had lowered the threshold for reporting short-selling to regulators for the next three months as current trading conditions posed a “serious threat” to “fragile” markets.

This was a “preliminary” step to help regulators get information about short-selling sooner and decide if further responses were needed, ESMA said.

“There is a clear risk that such downward trend will continue in the coming days and weeks,” ESMA added of the market sell-off triggered by the spread of the COVID-19 virus.

In short-selling, traders borrow a company stock with a view to selling it, hoping to buy it back later at a lower price and pocket the difference.

When the number of short-sellers outweighs those buying the stock, which could happen if investors rush to sell amid panic over coronavirus, that can further drive down the price of shares.

Under the new regime, short-sellers must report a transaction if their net short position reaches or exceeds 0.1% of the issued share capital, compared with 0.2% before Monday’s announcement.

The tougher reporting requirement apply to trading positions as of close of trading on Monday, though ESMA said it would not limit the capacity of market participants to enter or increase short-selling positions.

“ESMA considers that 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,” ESMA said.

“The measure can support more stringent action if required to ensure the orderly functioning of EU markets, financial stability and investor protection.”

Regulators in Spain and Italy imposed a one-day short-selling curb on Friday, but stock indexes on Monday continued their slide.

“Such temporary restrictions on short selling ... could not address the continuing threats as they are applicable for one trading day only,” ESMA said of the Spanish and Italian measures.

“ESMA considers it appropriate that national competent authorities closely monitor the evolution of the market and any evolution of net short positions before considering adopting any further measure,” it added.

Under EU law, national authorities have the power to introduce such bans, but are required to inform ESMA.

Many countries curbed short-selling in the aftermath of the 2008 financial crisis. While such bans can soften the impact of a shock, however, experts say they only work for a limited time and have little impact on the overall market.

Despite “extraordinary losses” in shares since Feb. 20, markets have functioned in an orderly way, and the integrity of markets has been largely preserved, ESMA said.

Reporting by Huw Jones and Sudip Kar-Gupta; editing by John O'Donnell and Mark Potter

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