European Union regulators that banned short-selling this month risk sapping investor confidence in the region because the rules lack clarity, lawyers said.
Traders are “pulling back on long positions because of concerns about damage that the bans are doing to liquidity and a general lack of confidence in European regulators to act rationally,” Darren Fox, financial services lawyer at London-based Simmons & Simmons LLP, said in a telephone interview.
France, Spain, Italy, and Belgium this month imposed temporary bans on short selling of some financial stocks in an effort to stabilize markets after European banks including Societe Generale SA hit their lowest level since the credit crisis of 2008. The Stoxx 600 Banks Index has fallen 5.8 percent since the four countries bans were enacted on Aug. 12. Greece imposed a similar ban on Aug. 8.
Fox said regulators angered investors by “flip-flopping” on details of the bans such as allowing short positions on indexes that were in effect before the ban to be replaced with new contracts. The four countries made changes to their bans on Aug. 18.
“The whole thing is a farce,” Fox said. “We’ve had to set up a twitter feed. The situation changes so quickly that it’s a good way of disseminating information to clients fast. In terms of inquiries, we’ve had hundreds of e-mails a day.”
Short sellers sell borrowed shares with plans to buy them back later at a lower price, a practice politicians and some investors blame for roiling markets. In a naked short-sale, traders agree to sell a security that they have not already arranged to borrow.
Lawyers also criticized the role of the European Securities and Markets Authority, the new European financial regulator that was created this year to coordinate rules throughout the EU.
The patchwork of short-selling bans “is an early demonstration of one the problems with ESMA’s structure,” Simon Gleeson, a financial regulation lawyer at Clifford Chance LLP in London, said in a telephone interview. “What is proposed is that ESMA should coordinate the national regulators. This is only useful if the members are prepared to be coordinated.”
Michel Barnier, the EU’s financial services commissioner, proposed legislation last year to rein in short-selling and give ESMA the power to ban the practice in crisis situations.
The plunge in European bank stocks this month showed the need for tighter restrictions on so-called naked short-selling, Barnier said.
“At the moment ESMA is in a bit of a gray area,” Fox said. “They’re trying to broker the peace because some of the bans are extra-territorial in nature and have impacts on markets in other jurisdictions.”
Market volatility that included the biggest decline in some lenders’ shares for almost 2 1/2 years “should be a clear call” for legislators to conclude the negotiations on a law quickly, Barnier said last week. ESMA declined to comment.
The measures, which concern both naked and non-naked short selling, need to be approved by a majority of national governments in the 27-nation region and by lawmakers in the European Parliament before they can enter into force. Their next negotiation session is scheduled for Sept. 6.
“My feeling is that it was always unrealistic to expect any pan-EU ban on short selling,” Richard Reid, director of research with the International Centre for Financial Regulation, said in an e-mail. “Partly this is because some countries regard such a move as being seen as panicky and risk even contributing to the mood of uncertainty.”