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 this week, 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, Reuters reported.
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.
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.
The European action comes as the White House reportedly fields calls from Wall Street to rein in short sellers as the stock market continues to tumble, sources rcently told the New York Post.
Specifically, several prominent investors and executives have asked the Trump administration to bring back a legacy securities regulation called the “uptick rule,” a White House adviser told the Post.
The rule, which got scrapped in 2007 by the Securities and Exchange Commission, bars short sellers from betting against stocks when their prices are falling. To place a so-called short bet that the stock will continue to fall, investors must wait for it to rise.
“There’s a crowd that wants to reinstitute the uptick rule,” the source told the Post. “It’s out there for discussion.”
© 2024 Newsmax Finance. All rights reserved.