EUROPE: ESMA publishes report on the impact of the EU Short-Selling Regulation on securities markets

Friday September 20 2013

The European Securities and Markets Authority has published its Trends, Risks, Vulnerabilities (TRV) Report and a Risk Dashboard for the second quarter of 2013. The report publishes the impact of the EU short-selling regulation on securities markets.

The TRV presents in-depth analyses on four specific topics:

• First evidence on the impact of the Short-Selling Regulation on securities markets;
• Contagion risks and the network structure of EU CDS exposures;
• Overview of the EU UCITS industry; and
• Overview of bail-in and contingent capital securities.

Short selling – Trends

The TRV found that around one half of the shares in the main EU national stock indices were subject to reported short-selling activities. However, there are strong disparities among EU members. The size of short positions held on national sovereign debt decreased substantially over the period.

Between 1 November 2012 and 31 March 2013 there were 336 short-sale notifications on shares to 18 EU National Competent Authorities among the altogether 550 shares available in the corresponding national indices. However, short-selling activity varied between countries with the share of short sold stocks in the main national indices ranging between 92% and 5%. Short sales of EU stocks belonging to the main national indices were stable following the entry into force of the Short-Selling Regulation on 1 November 2012. The median value across EU countries of the national median size of reported short positions increased from 0.66% to 0.88% of issued share capital.

Average aggregated net short positions on EU sovereign debt amounted to between 2% and 3.1% of total outstanding debt for the countries in the sample. These positions fell to 0.51% of the sample total debt outstanding in March 2013. This is likely due to a reduction in the size of individual short positions, allowing holders to avoid the reporting requirement. Short sales of EU sovereigns decreased sharply in value after the ShortSelling Regulation entered into force. The median size across the sample contracted from 1.65% to 1.1% of a country’s public debt outstanding.

Vulnerabilities

ESMA found that a total of 460 holders reported their positions to Competent Authorities during the period. The top ten holders accounted for 28% of all the short positions reported, indicating a significant degree of concentration. Otherwise, overall holdings of short positions reported were fairly diluted, with 75% of holders short on seven different shares or fewer; only 15 market participants were shorting 50 different shares or more, and four were short on more than 100 shares. This suggests that relatively few players were actually using short-selling as an active strategy for their trading activities. More than 83% of all reported short positions are held by
entities domiciled in the UK or the US.

Between 1 November 2012 and 28 February 2013, 148 notifications were made to NCAs on 13 sovereign issuers in 11 countries.The number of notifications received on shares (12,603) and the number of notifications received on sovereign debt (148) differ very strongly. The differences in the statistics are likely to result from the reporting threshold levels and the computation of duration-adjusted short positions on sovereign debt, as a consequence of which reporting thresholds are less likely to be surpassed.

Seven short selling restrictions were imposed between entry into force of the Regulation on 1 November 2012 and end March 2013. These temporary bans, ESMA argues, do not seem to have a significant impact on price formation – the ban significantly slowed the price formation process in only one of the seven cases, with price
formation remaining slow even after the ban was lifted. ESMA also argues that temporary bans do not seem to have a significant impact on price volatility, and have a small positive impact on returns (at the limit of significance) of the shares under short-selling restriction.

Click on the above link for the ESMA report.