Out of the chaos comes . . . well, confusion. Four years ago, amid the market turmoil, numerous countries imposed short selling bans. Each had its own variation. Result: a trader’s nightmare. In the European Union, this spurred rules aimed at ensuring a co-ordinated approach to such restrictions. Onto these regulations were tacked more politically driven measures affecting the trading of EU sovereign credit default swaps. The new regime begins today.
Whether this will have a significant impact on market activity is debatable. The new rules – which apply to all securities whose principal trading venue is in the EU regardless of the trader’s location, as well as debt issued by EU counties – ban naked short selling. They also impose heavier, harmonised disclosure requirements. What is not restricted is a short sale of shares (or sovereign debt) provided enforceable borrowing or delivery arrangements are in place. So, since most short selling is covered, the main result may be a reduction in the number of failed transactions (because of beefed-up delivery requirements), and extra, costly disclosure work. EU sovereign CDS outstanding have also fallen sharply ahead of the new rules, in part probably due to these, although the decline is not confined to the EU.
Regrettably, though, the new rules will enter into force without final details of market maker exemptions. More significant, it is still unclear what happens when an individual EU country wants to outlaw covered short selling. Spain, where a wide-ranging ban was introduced in July, is a case in point. Because of the new EU rules, its ban ran only until October 31. But Spain is now telling EU regulators that today it plans to impose a new similar three-month ban. Their response will doubtless be rapid – but for traders or investors, this hardly amounts to order and certainty. Plus ça change.