It’s a little over a year since the introduction of European Short Selling regulation and already it’s time for the European Commission to prepare its review. With its report due by the end of this month, the Commission has asked ESMA to provide some technical
advice. Not surprising to practitioners, but maybe to politicians, ESMA observed mixed effects on liquidity and a slight decrease in price discovery related to short selling bans. In a separate paper,
the Spanish regulator concluded that the ban on short selling “seems to be empirically associated with securities markets functioning worse”.
These results only strengthen the argument for abandoning short selling bans altogether. But, since this is unlikely, we’ll have to settle for some minor adjustments within the regulation to make day-to day operations as workable as possible. For example,
ESMA has suggested:
• allowing market makers in OTC traded instruments to benefit from the short sell exemption
• allowing internal locate arrangements within the same legal entity
Unfortunately ESMA insists on retaining some of the more cumbersome rules, including the requirement to include indices when calculating net positions. Investors holding an ETF based on the MSCI World Index will still need the daily weightings of each of
the roughly 1,600 constituents in order to work out their net position in each European stock. If they use that ETF to take a position on a broader market movement, this is just a pointless exercise.
It’s not certain when these adjustments will be implemented but, if the MiFID II and MAD II review processes are anything to go by, we could be in for the long haul as far as short selling is concerned. We’ll be sure to keep you posted.