EU watchdog ESMA tightens short-selling rules amid “serious threat to market confidence”

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The European Securities and Markets Authority, the pan-EU financial watchdog, tightened rules on short-selling on Monday, and will now require hedge funds and other holders of net short positions to notify their respective national regulators of positions greater than 0.1 per cent of a company’s share capital.

ESMA issued the temporary requirement on Monday against a backdrop of sustained extreme market volatility sparked by the Coronavirus pandemic, circumstances the regulatory agency described as “a serious threat to market confidence in the EU”.

Previously, the threshold of disclosure for short positions – a core element of most hedge fund strategies – was 0.2 per cent.

“ESMA considers that lowering the reporting threshold is a precautionary action that, under the exceptional circumstances linked to the ongoing COVID-19 pandemic, is essential for authorities to monitor developments in markets,” the agency said in an announcement, adding the plan – which takes immediate effect - is “appropriate and proportionate”.

“The measure can support more stringent action if required to ensure the orderly functioning of EU markets, financial stability and investor protection.”

ESMA said it will continue to monitor developments in financial markets as a result of the COVID-19 situation, in coordination with member states’ national regulators, and will use its powers to ensure the orderly functioning of EU markets, financial stability and investor protection.

Last week, the UK Financial Conduct Authority introduced a temporary ban on the short-selling of certain Italian and Spanish stocks, following similar measures by regulators in those countries, after dramatic falls in stock markets in Milan and Madrid.

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