Short-selling regulatory update amidst the COVID-19 pandemic

The current COVID-19 pandemic has undoubtedly, already had a negative impact on the financial market within the European Union (“EU”). Both the European Securities and Markets Authority (“ESMA”) and the National Competent Authorities (“NCA”), including the Malta Financial Services Authority, have hastily began taking measures which attempt to mitigate the repercussions that such pandemic has created and will continue to create on the financial market.

In line with Article 28(2)(b) of Regulation (EU) No 236/2012 on short selling and certain aspects of credit default swaps, although there have already been a scarce number of NCAs which have implemented measures to address the existing threat caused by COVID-19, the actions implemented were not considered as being adequate enough to “stabilise” the downward trends which we are currently facing and which we will continue to face in the coming weeks and months.

On 16 March 2020, ESMA published its decision as a preliminary action to aid in evaluating the present market situation. ESMA stipulated that natural or legal persons holding net short positions of shares traded on an EU regulated market must notify their respective NCAs if the position reaches or exceeds 0.1% of the issued share capital (as opposed to the 0.2% of issued share capital which was used as a reporting threshold prior to the 16 March 2020).

The rationale behind implementing a lower reporting threshold was to ensure that reports are being received at an earlier point of the build-up of a net-short position. Furthermore, lowering the reporting threshold allows NCAs to evaluate the current financial situation in a more efficient manner. Although monitoring market developments is undoubtedly necessary in ordinary market conditions, it is even more crucial at a time in which the financial market is becoming more volatile. Lower reporting threshold obligations will create greater transparency and will result in more effective monitoring of developments in markets.

Should the functioning and stability of the financial market be jeopardised, and additional regulatory responses be required, these will be implemented if and when necessary.

Spain, Italy, Germany, the United Kingdom and Northern Ireland, have issued temporary bans on several short sales. ESMA did not however consider such measures as being efficient enough to address the on-going threats posed by COVID-19 and have therefore decided that the 0.1% reporting threshold was to be implemented as of 16 March 2020.