Ban on short selling and newEuropean regulation
The supervisory bodies for securities markets in Spain
and Italy introducedmeasures in 2012 to temporarily ban
short selling on listed shares, as a result of the tensions
that followed the sovereign debt crisis. In addition, on
1 November 2012 harmonised European legislation
came into force on short selling, detailed in Regulation
236/2012 (the Regulation).
Both the Spanish and Italian supervisory boards, the
CNMV and the CONSOB respectively, introduced the
ban on the short selling of all listed Spanish and Italian
shares as of 23 July 2012. The ban in Italy affected only
financial sector securities, and only a few days later, on
July 27, it was lifted. The ban in Spain, which affected all
listed Spanish shares and their indices for three months,
as well as derivative products that represent an increase
in short positions in net terms, was extended first of all
until October 2012 and then later, once the new regu-
lation had come into force, until 31 January 2013, in
accordance with the powers bestowed on the regulatory
bodies by the new Regulation and which enable them to
introduce more restrictive measures than those included
in the regulation itself. The CNMV decided to lift its ban
on this same day, 31 January 2013.
As is well known, there is an intense debate on the effects
of banning short selling. There are various studies that
say that “from a theoretical point of view, there is a broad
consensus opinion that the possibility to short sell has
more positive effects on markets than negative. Short
positions provide the market with liquidity, in the same
way that any other strategy that channels orders does. But
at the same time, these transactions improve the market’s
efficiency, in the sense that they help the correct forma-
tion of prices, that is to say, they help ensure that prices
reflect the latest available information swiftly. These are
the conclusions of most of the theoretical studies carried
out over the last few decades”(CNMV 2010).
Negative effects on the price formation and
liquidity of the affected securities
In Spain, the ban on short selling for three months and its
later extension was justified as a response to “the excep-
tional situation in the Spanish financial system”, but the
cost was extremely high in terms of the deterioration in
liquidity and efficiency of pricing in the Spanish secu-
rities market as a whole, and in terms of the impact on
the European market, due to the weight of the biggest
Spanish securities in the European indices. According to
recently published studies, “the stabilising power of the
ban with regards to certain medium-sized banks had a
high cost in terms of relative liquidity, trading volumes,
and pricing efficiency”(CNMV 2012). To summarise, a ban
as disproportionate as the one introduced in Spain in
2012 threatens the liquidity, efficiency, and credibility of
the country’s securities market and causes a lack of confi-
dence in the market mechanisms. A cost that could have
been reduced by limiting the scope of the measure to a
small group of securities, or perhaps to specific securities.
Very recent reports are also beginning to warn about the
disruptions in the relationships between different finan-
cial assets and markets of different countries caused by
the decisions on whether or not to ban short selling. In
Europe, the adoption of these kinds of measures since
the start of the financial crisis has created obstacles to
the correct functioning of the internal market, due to the
discrepancies that exist between legislations. It was with
the aim of harmonising legislation on short selling that
the new regulation set out in Regulation 236/2012 and
its implementing regulations came in to being.
The legislation approved by the EU
The new European legislation on short selling affects not
only shares but also bonds and other traded instruments.
It focuses on two key points: the setting up of a regime of
transparency for significant net short selling; and the ban
on so-called naked short selling
The regime of transparency for significant net short
selling on shares and sovereign debt stipulates that
the regulator must be notified of these positions once
certain percentages are passed. In the case of net short
selling on shares, all those positions that reach 0.2%
or fall below 0.2% of the issuer’s share capital must be
declared. Net short selling of Spanish sovereign debt
has to be declared when the position reaches or falls
below 0.5% of the outstanding balance of the sovereign
debt issue in question. In addition, any net short selling
of shares that reaches or falls below 0.5% of the share
capital must be published on a website managed/super-
vised by the CNMV.
The Regulation forbids the naked short selling of shares
or sovereign debt. These are selling positions in which
the seller doesn’t hold either the securities or the guaran-
tees for their delivery (they haven’t borrowed the securi-
ties and neither do they have agreements or pacts with
third parties for their delivery). As for uncovered credit
default swaps (CDS), these are also forbidden, given that
the Regulation demands that the person who enters into
a CDS contract must also hold a long position on the
sovereign debt instrument in question.
The new regulations grant powers to the regulators to
allow them to establish, temporarily, more restrictive
measures than those envisaged by the prevailing regula-
tion, when exceptional developments or circumstances
take place that pose a threat to financial stability or
confidence in the market and when there is a decrease
in the value of a financial security. The measures adopted
under these circumstances will operate for three months
and they will be adopted to deal with such a threat,
avoiding any significant harm to the efficiency of the
financial markets.
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