Ban on short selling in the times of COVID-19

Ban on short selling in the times of COVID-19

It would be an understatement to say that the COVID-19 pandemic has but its mark on capital markets. The primary indices have more or less been lit red since late February. The Icelandic OMX10 is negative by double digits since the start of 2020 after reaching its all-time high in the beginning of January. Given the circumstances, it’s no surprise that regulators have tried to intervene. 

The Short Selling Regulation (SSR), which has been implemented in Iceland through the EEA Agreement, gives competent authorities powers of intervention in certain circumstances. Mainly, they have the power to limit or ban short positions. The powers of intervention are founded in the sentiment that short selling in and of itself can increase the loss of value in stock markets, increase market volatility and increase systemic risk. Large short positions can likewise function has warning signals for other investors and lead to a sell-off on the financial instrument being shorted, which can lead to abnormal price formation. A handful of market regulators in Europe have already taken action by severely limiting, or outright banning, the short selling of registered stocks. Specifically, the following jurisdictions have introduced short selling limitations:

Jurisdiction

Limitation type and scope

Timeframe of limitations

EU/EEA

Notification threshold for net short positions moved from 0,2% to 0,1%

16 March 2020 to 16 June 2020.

Italy

Ban on transactions that constitute or increase net short positions in all stocks which are registered at the Mercato Telematico Azionario (MTA) and are subject to the oversight of the Italian Financial Authority (CONSOB)

The ban is extended to certain index-related and basket financial instruments. 

Short-term bans from 13 March 2020 to 17 March 2020.

Long-term ban from 18 March 2020 to 18 June 2020.

Spain

Ban on transactions that constitute or increase net short positions in all stocks which are registered at the Bolsa de Madrid, Bolsa de Barcelona, Bolsa de Valencia, Bolsa de Bilbao and Mercado Alternativo Bursátil markets and are subject to the oversight of the Spanish Financial Authority (CNMV).

The ban is extended to certain index-related and basket financial instruments.

Short-term ban on 13 March 2020.

Long-term ban from 17 March 2020 to 17 April 2020.

France

Ban on transactions that constitute or increase net short positions in all stocks which are regulated in the Euronext Paris, Euronext Growth Paris and Euronext Access Paris markets and are subject to the oversight of the French Financial Authority (AMF).

The ban is extended to certain index-related and basket financial instruments.

Short-term ban on 17 March 2020.

Long-term ban from 18 March 2020 to 16 April 2020.

Belgium

Ban on transactions that constitute or increase net short positions in all stocks which are registered at the Euronext Brussels and Euronext Growth markets and are subject to the oversight of the Belgian Financial Authority (FSMA).

The ban is extended to certain index-related and basket financial instruments.

Long-term ban from 17 March 2020 to 17 April 2020.

 

Greece

Ban on transactions that constitute or increase net short positions in all stocks which are registered in the Athens stock exchange (ASE) and are subject to the oversight of the Hellenic Financial Authority (HCMC). The ban explicitly includes sales of shares covered by subsequent intraday purchases. 

The ban is extended to certain index-related and basket financial instruments.

Long-term ban from 18 March 2020 to 24 April 2020.

Austria

Ban on transactions that constitute or increase net short positions in all stocks which are registered in the Amtlicher Handel (WBAH) market and are subject to the oversight of the Austrian Financial Authority (FMA).

The ban is extended to certain index-related and basket financial instruments.

Long-term ban from 18 March 2020 to 18 April 2020.


The European Securities and Markets Authority (ESMA) and the EFTA Surveillance Authority (ESA) have also acted. On 16 March, ESMA decided to change the notification threshold according to the SSR. On the same day, ESA published a similar decision regarding the EEA-countries not directly subject to ESMA’s authority (Iceland, Norway and Lichtenstein). Pursuant to the decision, the net short position threshold for notifying competent authorities has been changed from a 0,2% net short position in the relevant stock to 0,1%. The decisions are binding upon their publication and are intended to increase regulatory oversight of market behavior to ensure continued function and integrity of the financial markets; giving ample room for further action if need be.The short selling of registered stocks has not been widely discussed in Iceland and do not seem, at this time, to be of concern. At the time of writing, no plans seem to be in place to implementing further limitations on short selling in addition to the limitations of the SSR. Further developments will be interesting to follow, both in Iceland and elsewhere.

Freyr Snæbjörnsson

Freyr Snæbjörnsson

Jónas Már Torfason