EU Toughens Short-Selling Reporting As Virus Hits Stocks

Law360, London (March 16, 2020, 1:19 PM GMT) -- Europe’s financial markets watchdog told traders Monday that they must hand over additional information on their short-selling bets in a bid to prevent the price of shares tumbling further during the coronavirus outbreak.

The European Securities and Markets Authority said it will temporarily lower the threshold for reporting short positions so that it can monitor investors who are gambling on the price of stocks falling during the pandemic. This will allow the regulator to intervene if the shares slump to dangerously low levels.

Traders can borrow company shares to sell, with a view of buying them back later at a reduced price to profit from the difference. But the process, known as short-selling, can drive down share prices further if the number of short sellers outweigh buyers — which is more likely during a global virus scare.

“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,” the regulator said in a statement on Monday.

Traders must inform their national regulator if their short position reaches or exceeds 0.1% of the issued share capital of the company with immediate effect from Monday, ESMA said. The threshold was previously 0.2%.

The European Union authority said that the measure is appropriate and proportionate to address the outbreak’s threat to financial markets.

EU rules also enable national regulators to temporarily restrict short sales in case of a significant fall in the price of a financial instrument. Last week, the Italian financial regulator Consob and Spain’s Comisión Nacional del Mercado de Valores imposed a ban on short-selling.

The Financial Conduct Authority temporarily banned the short-selling of more than 150 Spanish and Italian stocks listed on the London Stock Exchange on Friday in response to the regulators’ request.

The FCA's list of companies protected from short sellers included a number of major banks, including Banco Santander SA ,Banco Bilbao Vizcaya Argentaria SA and Italian bank UBI Banca.

The ban came in response to Italian stock prices plunging 17% on Thursday, a day after the Italian government extended a national lockdown on schools and public gatherings to include bars and restaurants. And Spanish share prices dropped 14% on the same day.

--Additional reporting by Joanne Faulkner. Editing by Tom Mudd.

For a reprint of this article, please contact reprints@law360.com.

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