Comments on the Short selling ban imposed by the ESMA
Friday, August 12, 2011
On 11 August, 2011, after yesterday’s market close, the European Securities and Markets Authority said that France and Italy, whose financial stocks have been hardest hit in the recent days, will impose a ban on shorts against financial stocks. Belgium and Spain will also join the ban, which takes effect from today and will be in place for at least 15 days. It may be extended if deemed necessary.
France will restrict short selling on equities in 11 financial institutions including SocGen, BNP and Credit Agricole for both residents and nonresidents. In Belgium, short selling “by any means whatsoever” in KBC, Dexia and Ageas will be banned. While existing shorts won’t be forced out, they will not be able to be added to. In Spain, 16 financial institutions, including Santander, Banco Popular as well as smaller lenders like Bankia, will be included in the ban. Again, restrictions apply not only to cash shorts but also artificial shorting via derivatives. The Italian regulator Consob is yet to reveal details the ban there.
Spain’s inclusion in the ban comes despite its securities regulator stating only an hour before yesterday’s close that there was “no change to its short selling policy”. This is clearly a quick fix, then, and a dubious one at that. Although market makers and liquidity providers executing a specific contract, such as a client block trades, have been excluded from the bans, I believe that the ban will only further damage liquidity in the already-fragile Euro markets.
ESMA said that, when used in conjunction with false rumors, short selling was "clearly abusive", and the French FinMin Baroin has this morning said that his nation’s banks are amongst the safest in the world. But while the hammering the likes of SocGen have received of late has no doubt been exacerbated by speculative rumors, there is still a fundamental reason driving the weakness, which imposing a ban on short selling won’t address the fact that investors are legitimately concerned about contagion across Europe and throughout the Western world, and will continue to reduce their exposure to risky assets, with or without a short selling ban.
In any case, short selling bans have a proven track record of failure, and did not prevent Greece, Portugal, or Ireland from succumbing to the need for Euro assistance. The US, too, imposed a short selling ban back on September 19 2008; while prompting a quick rally which was unwound a few days later and, by the time the ban was removed on Oct 2 the S&P had lost 11% in value; by November 10, 28% had been wiped off.
So while I expect the ban will squeeze shorts out and lead to a short-term bounce in bourses, it is likely to only be temporary. As investors continue to focus on the problems facing the Euro zone, equity markets will continue to come under pressure. With liquidity reduced, conditions will only become more volatile.
The French FinMin this morning has said that "investors can count on strong Franco-German proposals" when Merkel and Sarkozy meet next Tuesday. Apparently both are working towards a September deadline for EFSF ratification. However, the German press this morning is suggesting that strong opposition from the FDP will leave Merkel unable to pass the package by September. Suggestions are that the facility will only be fully ratified by October at the earliest. The FT reports that EU officials are investigating whether the EUR24bn of loan pledges left over from the first Greek bailout can be used to conduct the EUR20bn in Greek debt swaps planned for mid-September, after realizing that legislative delays will mean the EFSF will not be ready in time.
