Coronavirus – ESMA lowers reporting threshold for short selling

ESMA temporarily lowers the reporting threshold of net short positions (short selling) from 0.2% to 0.1% of the issued share capital of companies as a result of the coronavirus (COVID-19) outbreak. 

The European Securities and Markets Authority (ESMA) introduces a series of measures in the wake of the COVID-19 situation; the reporting threshold for natural or legal persons having short positions in companies is temporarily lowered from the current level of 0.2% to 0.1%. The change means that the reporting obligation will be triggered earlier than normal, immediately requiring market participants to report certain positions not previously covered by the reporting obligation.

Accordingly, if a short position in a company admitted to trading on a regulated market in Denmark exceeds the threshold of 0.1% of the issued share capital, the Danish Financial Supervisory Authority must be notified thereof without delay. If a person has short positions in companies admitted to trading on a regulated market in another EU Member State that exceed 0.1% of the issued share capital, this must be reported to the national competent authority, no matter whether the percentage of short positions was obtained before or after this measure entered into force.

Notification of short positions to the Danish FSA
The measure takes immediate effect. The result is that all natural and legal persons are therefore required to report to the Danish Financial Supervisory Authority if they have or enter into short positions in listed companies in case the position reaches or exceeds 0.1% of the issued share capital by the end of the trading session on Monday, 16 March 2020.

However, the measure does not apply to short positions if the shares are admitted to trading on two or more regulated markets and the primary listing is in a third country and a listing on an EU market is secondary.

The notification to the Danish Financial Supervisory Authority will continue to be a “private” notification, which will not be disclosed in the market. The limit for making a public notification of short positions to markets of 0.5% or more of the issued share capital therefore remains unchanged.

The purpose of the measure and its ability to address relevant threats
COVID-19 has turned out to pose a major threat to the European Union’s financial markets, leading to increased price volatility and sharp stock market falls throughout the EU. The current state of uncertainty and increased price volatility are likely to continue in the near future. According to ESMA, the current situation puts pressure on both the orderly functioning of and confidence in the financial market of the European Union.

A significant sales pressure combined with the unusual volatility of share prices is already under way. Market participants will be able to take new short positions to make a profit on further price falls, but the building up of short positions could, according to ESMA, contribute to accelerating further price volatility and aggravating the market losses experienced in recent weeks.

ESMA therefore considers that the present market conditions extensively constitute threats to financial stability in the Union, the orderly functioning of the financial markets and investor protection. ESMA’s measure is designed partly to ensure that both ESMA and the national competent authorities are able to assess the situation on the financial markets on an ongoing basis, partly to react if the orderly functioning and stability of the market require even more stringent actions.

Threat to the stability of the whole or part of the financial system in the Union
The last few weeks have been characterised by substantial selling pressure and unusual volatility, combined with significant downward spirals affecting issuers from virtually all types of sectors. Unabated selling pressure on the shares of banks and other financial institutions as well as a wide range of issuers from all sectors can, according to ESMA, put the financial stability of one or several Member States and ultimately the financial system in the Union at risk. 

ESMA’s measure to temporarily lower the reporting thresholds of net short positions to national competent authorities is an attempt to addresses this threat posed to the stability of parts or ultimately the whole of the financial system in the Union.

For more information, see ESMA’s decision, which can be found on the following link:

ESMA’s decision of 16 March 2020

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