ESMA Lowers Reporting Threshold Due to Coronavirus Outbreak

European Securities and Markets Authority (ESMA) has lowered the reporting threshold for net short positions. The regulatory authority has implemented these measures as a precaution regarding coronaviruses.

16 March, 2020 | AtoZ Markets – Hedge funds and other investors will need to provide regulators with more information about the bets they take. ESMA warned that a coronavirus-triggered market meltdown could last weeks. ESMA released a temporary decision in which it lowered the reporting threshold for net short positions as a precautionary measure for COVID-19.

EU Tightens Short-Selling Rules

It is a “preliminary” measure to help regulators get information about short selling faster and to decide if further responses are needed, ESMA said. “There is an obvious risk that this downward trend will continue in the days and weeks to come,” said ESMA. The spread of the COVID-19 virus triggered the market sell-off.

In short selling, traders borrow shares of a company to sell them. They hope to buy them later at a lower price. The number of short-sellers exceeds the number of buyers that can happen if investors rush to sell in a climate of panic over the coronavirus. It can lower the price of stocks even more.

In particular, the European regulator now requires that holders of net short positions in shares traded on an EU regulated market notify the relevant national competent authority (NCA). They have to notify if the position reaches or exceeds 0.1% of the issued share capital. European watchdog said:

“Lowering the reporting threshold is a precautionary measure which, in the exceptional circumstances due to the ongoing COVID-19 pandemic. The authorities need to monitor market developments”.

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The Current Situation is a Serious Threat

This measure can support stricter action if it is necessary to ensure the orderly functioning of the EU markets, financial stability, and investor protection. However, ESMA considers that the current circumstances constitute a serious threat to the confidence of markets in the EU. The proposed measure is appropriate to address the current level of threat to EU financial markets. 

Regulators in Spain and Italy imposed a reduction in short sales by one day on Friday. But stock market indexes continued to fall on Monday. “These temporary restrictions on short sales could not respond to permanent threats. They are only applicable for a single trading day,” ESMA said of the Spanish and Italian measures.

The lowered threshold takes effect immediately. The holders who meet the criteria must notify the NCAs at the close of the 16 March 2020 trading session.  Last Week, ESMA also recommended a contingency plan for financial market participants due to the Coronavirus outbreak. Moreover, the NYDFS required crypto companies to provide detailed of coronavirus contingency plans.

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