Law firm comments Esma shorting policy amid Coronavirus crisis

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Following the announcement earlier this week that the European Securities and Markets Authority (Esma) had changed the rules on short selling, Leonard Ng, partner at law firm Sidley Austin has comented on two key aspects of the restrictions set in place.

On 16 March, Esma announced ( that holders of net short positions in shares traded on a European Union regulated market would be required to notify the relevant national competent authority (NCA) if the position reaches or exceeds 0.1% of the issued share capital. The rule is intended to be in place for three months.

IE. Why was threshold not just reduced to 0%? Is there a significant technical difference between 0.2% and 0.1%?

Ng. "Short selling activity in and of itself is acceptable, unless banned (which has just happened in France, Italy, Belgium, Spain and Greece yesterday and today). Regulators simply what to have a view of short selling activity only when it is meaningful.  0.2% was considered meaningful under the SSR, but because of market turmoil they want to be able to get a more detailed look at short selling activity."

IE. The UK government earlier this year suggested it would pull out of talks with EU27, eg, by June, on a trade deal post transition, if it felt that the talks were going nowhere; if this were to happen, what would status of the Esma rule become in the UK, eg, could UK gov't say it is ignoring the rule henceforth?

Ng. "From 1 Jan 2021 the UK can ignore Esma/EU rules and so it could ignore such a reduction in the short selling thresholds. Interestingly the UK published a statement where it stated: "We will apply this change in the UK. This requires changes to our technology to receive these data. We are working on what is involved to effect these changes and how long it will take to implement them. In the meantime, firms should continue to report according to the previous thresholds, until further notice." This is not related to Brexit, of course, but in effect firms do not have to comply with the reduced threshold in respect of UK shares for the time being."

The Esma decision to lower the threshold is considered a precautionary action that, under the exceptional circumstances linked to the ongoing Covid-19 pandemic, is essential for authorities to monitor developments in markets, Ng added.

It does not apply to shares admitted to trading on a regulated market where the principal venue for the trading of the shares is located in a third country. The ESMA Exempted Shares List identifies shares having their principal trading venue located in a third country.

The ESMA Decision does not apply to firms that are carrying on market making activities under article 2(1)(k) of the Short Selling Regulation (Regulation (EU) no. 236/2012).