Banning bets on falling share prices in the EU has not damaged prices or ramped up volatility on stock markets, the bloc’s securities regulator said yesterday, largely refuting market players’ concerns.
Curbs on so-called short-selling of government debt have, however, hit turnover in a few cases, according to the European Securities and Markets Authority (ESMA) in its first study of new EU short-selling rules.
Short-selling, or “shorting”, usually involves someone borrowing a financial instrument and then selling it, hoping the price will fall so they can make a profit when they buy it back to cover their position.
The EU rules, which include coordinating temporary short-selling bans and requiring short-sellers to report positions above a certain threshold, came into force last November after politicians accused hedge funds of worsening the banking and eurozone debt crises by shorting bank shares and using credit default swaps (CDS) to short bonds of debt-laden governments.
Critics argued that temporary bans on short-selling would hamper the ability of markets to come up with prices and would generate swings in prices.
“Temporary bans do not seem to have a significant impact on price formation,” ESMA said in its study.
“Temporary bans do not seem to have a significant impact on price volatility, and have a small positive impact on returns ... of the shares under short-selling restriction,” it added.
Trading volume was hit in some cases, however, something which market participants had predicted.
ESMA said there were 12,603 notifications related to 4,000 short positions between November 2012 and the end of February, with a third from Britain, the EU’s biggest share trading centre.
The average size of short-selling positions reported was €28.3 million for shares, and €2.9 billion for sovereign debt.
Most of those shorting the stock market were hedge funds and fund management companies, with only five banks among the 50 biggest holders of short positions.
Data so far suggests that relatively few players were using short-selling as an active strategy for trading, ESMA said.
Over 80 per cent of shorts reported were held by firms based in Britain and the US, while the Cayman Islands and Bermuda, two popular hedge fund homes, also featured.
ESMA said initial evidence did not back some of the concerns expressed by debt market participants about short-selling, but that CDS liquidity in a few specific countries and instruments did experience a significant deterioration.
“Overall, liquidity in the EU sovereign CDS market did not decrease significantly after the regulation entered into force,” ESMA said. (Reuters)