SHORT SALE BANS IN RESPONSE TO THE COVID-19 PANDEMIC

I. Charting the Proliferation of Current Short Sale Bans and Other Actions

In the wake of the COVID-19 pandemic, numerous European jurisdictions, including France, Italy, Spain, Greece and Belgium have enacted short sale bans in an attempt to stabilize financial markets and maintain investor confidence. The following note provides an overview of these bans as well as an overview of the 2008 partial ban(s) on short selling by the U.S. in response to the financial crisis. To date, the United States has not yet indicated that it is considering a ban on short selling in response to market volatility due to the COVID-19 pandemic. Securities and Exchange Commission (SEC) Chairman Jay Clayton recently noted that he believes the United States should not ban short selling, as investors “need to be able to be on the short side of the market in order to facilitate ordinary market trading.”^[1] The U.K.’s Financial Conduct Authority (FCA) confirmed on March 23, 2020 that the U.K. has not yet implemented a short selling ban. Where other EU member states have implemented a short selling ban, the FCA has followed those bans.

Effective March 16, 2020, the European Securities and Markets Authority (ESMA) requires all holders of net short positions in shares traded on an EU regulated market to notify the relevant national regulators if the position reaches or exceeds 0.1% of the issued share capital. This requirement applies to natural or legal persons, regardless of where they are located. This is a temporary three-month measure, ending in June 2020. Details of ESMA’s measures are available in our client note, “ESMA Introduces Lower Short Position Reporting Threshold.”^[2]

Section II provides an overview of the short selling bans in Europe.

Section III covers how the U.S. responded to short selling during the 2008 financial crisis.

• Section 3.1 details the two emergency orders issued by the SEC on September 18, 2008.
• Section 3.2 provides a brief summary of the amendments made to Regulation SHO due to the financial crisis.

II. Overview of Short Selling Bans in Europe

Appended below is an overview of the short selling bans implemented in France, Italy, Spain, Belgium, Greece and Austria.

1. France: France’s financial market regulator, the Autorité des Marchés Financiers (AMF), banned short selling in 92 specified equities for a one-day period, beginning on March 16, 2020 and ending on March 17, 2020. This applied to many of France’s blue-chip stocks, including BNP Paribas and Renault.^[3] On March 18, 2020, the AMF announced a one-month ban on short selling of shares admitted to trading on French trading venues (such as Euronext Paris, Euronext Growth Paris and Euronext Access Paris), ending April 16, 2020.
2. Italy^[4]: On March 17, Commissione Nazionale per le Società e la Borsa (CONSOB), the governmental authority of Italy responsible for regulating the securities market, introduced a temporary ban on taking or increasing net short positions in respect of all shares admitted for trading on the Mercato Telematico Azionario (“MTA”), the Italian regulated stock market. This temporary ban is in place from March 18, 2020 until the end of the trading day on June 18, 2020. However, CONSOB reserves the right to lift these restrictions at an earlier time, subject to market conditions.
3. Spain: Comision Nacional del Mercado de Valores (CNMV), Spain’s securities regulator, similarly banned short sales due to the extreme volatility of the European securities markets. The ban  is on short selling of shares admitted to Spanish trading venues (such as Bolsa De Madrid, S.A., Bolsa De Barcelona, S.A., Bolsa De Valencia, S.A., Bolsa De Bilbao, S.A. and Mercado Alternativo Bursátil, S.A.) and began on March 17, 2020 and lasts until April 17, 2020, but can be extended for additional periods not exceeding three months. CNMV can extend the ban if it deems necessary, but may also lift the ban before the one-month deadline.^[5]
4. Belgium: The Financial Services and Markets Authority (FSMA) in Belgium also announced a ban on short sales for shares admitted to trading on Belgian trading venues (Euronext Brussels and Euronext Growth), as well as related instruments, taking effect on March 18, 2020 and lasting until April 17, 2020. The FSMA announced this ban in light of a possible evolution “toward substantial threats to financial stability.”^[6]
5. Greece: The Hellenic Capital Market Commission (HCMC) in Greece has imposed a ban on short sales in respect of all shares admitted to trading on the Athens Stock Exchange as well as related instruments, taking effect on March 18, 2020 and lasting until April 24, 2020.^[7]
6. Austria: The Austria Financial Market Authority (FMA) has imposed a ban on short sales in respect of all shares admitted to trading on the Regulated Market of the Vienna Stock Exchange (“Wiener Börse”) for which the FMA is the competent authority. The ban entered into force on March 18, 2020, lasting until April 18, 2020.

The bans apply to any natural or legal person, regardless of where they are located. In each jurisdiction, American depositary receipts (ADRs) representing underlying shares listed in that jurisdiction are within scope of the ban, even if they are traded on a U.S. venue by U.S. persons. The prohibitions do not apply to market-making activities or to trading in index-related instruments.

III. US Short Sale Ban in 2008

3.1 Initial Emergency Orders

On September 18, 2008, the SEC issued two emergency orders in light of the financial crisis.^[8] The orders (i) prohibited short selling in a wide array of financial stocks, and (ii) required institutional money managers of a certain size to report short sales to the SEC on a weekly basis. The SEC issued these orders because investors were aggressively short selling financial institution stocks. The SEC believed that “unbridled short selling […] contribute[d] to the recent sudden price declines in the securities of financial institutions unrelated to true price valuation.”^[9]

The first emergency order^[10] prohibited short sales in stocks of U.S. financial institutions. Originally, this short sale ban had the following three exemptions: (i) short sales by bona fide market makers; (ii) short sales that occurred as a result of automatic exercise or assignment of an equity option due to expiration of the option; and (iii) short sales effected by options market makers when short selling as part of a bona fide market-making and hedging activities related directly to bona fide market-making in derivatives. Amendments to the emergency order enacted on September 21, 2008, however, revised such exemptions by: (i) amending the list of financial institutions covered by the ban; (ii) allowing an exception for certain futures contracts; (iii) allowing an exception for certain assignments of options; and (iv) expanding previous exceptions for bona fide market-making and hedging activity.^[11]

The second emergency order^[12] required institutional investment managers that exercise investment discretion with respect to accounts holding Section 13(f) securities with an aggregate fair market value of at least $100,000,000 to file a Form SH with the SEC. The SEC required Form SH to be filed electronically with the SEC on the first business day of every calendar week immediately following a week in which the manager effected short sales. The requirement to file a Form SH expired on August 1, 2009.^[13]

These emergency orders were originally effective from September 18, 2008 to October 2, 2008. However, on October 2, 2008, the SEC extended the ban on short sales, citing “continued concerns regarding the ongoing threat of market disruption and investor confidence in financial markets.”^[14] On October 3, 2008, President George W. Bush signed the Economic Stabilization Act into law, authorizing the Secretary of the Treasury to buy up to $700 billion of troubled assets in an attempt to restore liquidity to the financial markets.^[15] Accordingly, the ban of short sales expired at midnight on October 8, 2008.

After the short sale ban, former SEC Chairman Christopher Cox expressed regret with the decision, noting that he believed the SEC would not ban short sales again as the costs “appear to outweigh the benefits.” James Overdahl, the SEC’s chief economist from 2007 to 2010 similarly expressed regret, noting that the net result of banning short sales was harmful.

3.2 Regulation SHO Amendments

On September 17, 2008, the SEC also adopted certain amendments to Regulation SHO^[16] implemented in 2005 to govern short sale trading strategies.^[17] The amendments aimed to “significantly reduce any possibility that ‘naked’ short selling contributes to the disruption of markets,” and included provisions: (i) imposing penalties for failing to deliver an equity security under Rule 204T of Regulation SHO and (ii) eliminating the “options market maker” exception.

As originally drafted on September 17, 2008, Rule 204T of Regulation SHO imposed a penalty on any “participant” of a “registered clearing agency,” and any broker-dealer from which it receives trades for clearance and settlement, for having a “fail to deliver” position at a registered clearing agency in any equity security, subject to certain exemptions. Specifically, any participant of a registered clearing agency, by no later than the beginning of regular trading hours on the settlement day following the settlement date, had to immediately close out the fail to deliver position by borrowing or purchasing securities of like kind and quantity. In October 2008, the SEC adopted Temporary Rule 204T of Regulation SHO, before implementing a final version of Rule 204 on July 31, 2009.^[18]

Notably, the SEC actions relating to short selling discussed above ran in parallel with similar actions taken by authorities around the world to prohibit or place restrictions on short selling.^[19]

IV. U.S. Broker-Dealer Considerations

Whether the United States will ban or otherwise restrict short sales in light of the COVID-19 pandemic remains unknown, although based on his comments, it appears that Chairman Clayton does not support a short sale ban in the United States. However, there may be renewed pressure to take action with respect to short sales given the volatility of the market in response to the COVID-19 pandemic and the European countries’ respective bans on short selling described above.

As the COVID-19 pandemic continues to impact markets, Shearman & Sterling LLP will closely monitor regulatory developments. We are happy to respond to any questions or concerns you may have.