Decision of the European Securities and Markets Authority of 16 March 2020 on the temporary lowering of the notification threshold for net short positions in shares admitted to trading on a regulated market

16 March 2020 ESMA70-155-9546 DECISION OF THE EUROPEAN SECURITIES AND MARKETS AUTHORITY of 16 March 2020 on the temporary lowering of the threshold for notification of net short positions in issued share capital of companies whose shares are admitted to trading on a regulated market and requiring natural or legal persons holding net short positions to notify the competent authorities in the event of crossing a certain threshold in accordance with Article 28(1)(a) of Regulation (EU) No 236/2012 of the European Parliament and of the Council

2 THE BOARD OF SUPERVISORS OF THE EUROPEAN SECURITIES AND MARKETS AUTHORITY, Having regard to the Treaty on the Functioning of the European Union, Having regard to the Agreement on the European Economic Area, and in particular Annex IX thereto, Having regard to Regulation (EU) No 1095/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Securities and Markets Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/77/EC(1), and in particular Article 9(5), Article 43(2) and Article 44(1) thereof, Having regard to Regulation (EU) No 236/2012 of the European Parliament and of the Council of 14 March 2012 on short selling and certain aspects of credit default swaps(2), and in particular Article 28 thereof, Having regard to Commission Delegated Regulation (EU) No 918/2012 of 5 July 2012 supplementing Regulation (EU) No 236/2012 of the European Parliament and of the Council on short selling and certain aspects of credit default swaps as regards definitions, calculation of net short positions, credit default swap covered instruments, notification thresholds, liquidity thresholds for temporary suspension of restrictions, significant falls in the value of financial instruments and adverse events(3), and in particular Article 24 thereof, whereas:

1. Introduction (1) This Decision of the European Securities and Markets Authority (ESMA) requires natural or legal persons holding net short positions in shares admitted to trading on a regulated market to notify the competent authority of details of such position if that position reaches or exceeds 0.1% of the issued share capital. (2) The measure introduced by ESMA's Decision responds to the need for national competent authorities and ESMA to be aware of net short positions held by market participants in shares admitted to trading on a regulated market, given recent exceptional movements in financial markets.

1 OJ L 331, 15.12.2010, p. 84. 2 OJ L 86, 24.3.2012, p. 1. 3 OJ L 274, 9.10.2012, p. 1.

3 2. Ability of the measure to address threats and cross-border effects (Article 28(2)(a) of Regulation (EU) No 236/2012) a. Threat to the orderly functioning and integrity of financial markets (3) The emergence of the COVID-19 pandemic has serious negative effects on the real economy and the financial markets of the EU. As regards the latter, EU stock markets have lost 30% of their value since 20 February 2020 [Figure 1], and the sharp drop in share prices has affected all sectors and types of issuers. (4) ESMA considers that this adverse situation is a serious threat to the orderly functioning and integrity of financial markets. Indeed, price movements are linked to the spread of the COVID-19 pandemic in the EU, which has significantly increased sensitivity on EU financial markets. There is a clear risk that this downward trend will continue in the coming days and weeks. Such a sharp drop in prices undermines the price formation mechanism and thereby threatens the integrity and orderly functioning of the market. (5) At the same time, market confidence is called into question due to serious losses. A reduction in confidence is a threat to the orderly functioning and integrity of the market because it could lead to further volatility and a downward spiral of prices. (6) In this context, as further explained in Section 3 below, short selling can contribute to increasing price volatility and worsening market losses. (7) Within ESMA's mandate, the proposed measures oblige natural and legal persons holding net short positions in shares admitted to trading on a regulated market to report to national competent authorities at thresholds lower than those set out in Article 5 of Regulation (EU) 236/2012. This should improve the ability of national competent authorities and ESMA to appropriately assess the situation and respond if further stricter measures are needed for the integrity, orderly functioning and stability of the market. b. Threat to the stability of the whole or part of the financial system of the Union (8) As the European Central Bank (ECB) explained in its publication Financial Stability Review(4), financial stability is a state in which the financial system, which includes financial intermediaries, markets and market infrastructures, is able to withstand shocks and the consequences of financial imbalances. Significant selling pressure and unusual volatility in share prices are already at play and could persist. In such a situation, market participants may take new short positions to benefit from further price declines, thereby worsening the drop recorded in recent weeks. ESMA considers that current market conditions pose a significant threat to the financial stability of the Union. (9) Due to the drop in prices, the vast majority of shares, if not all shares admitted to trading on a regulated market, found themselves in a state of uncertainty, in which a further price drop not driven by additional fundamental information could have extremely harmful consequences.

4 https://www.ecb.europa.eu/pub/financial-stability/fsr/html/ecb.fsr201911~facad0251f.en.html.

4 (10) It is precisely at this stage of events, as more and more information relating to COVID-19 reaches the market, that the measure could be most effective by enabling national competent authorities to better monitor market developments and adjust further regulatory responses. (11) ESMA considers that the lowering of reporting thresholds is a preliminary measure, which is key for monitoring market developments in these exceptional circumstances. It can be used to assess and possibly gradually introduce further regulatory responses if they prove necessary. c. Cross-border effects (12) The previously described threats to market integrity, orderly functioning and financial stability have significance for the entire EU. Since 20 February 2020, the EUROSTOXX 50 index, which covers 50 so-called blue-chip issuers from 11(5) euro area countries, has fallen by approximately 30% [Figure 1]. Moreover, the effect of unusual selling pressure is also evident from the main EU market indices [Figure 2]. (13) Given that the threats affect the financial markets of every EU Member State, the cross-border effects are particularly serious.

3. No competent authority has taken measures to address the threat, and one or two competent authorities have taken measures that do not address the threat in an appropriate manner (Article 28(2)(b) of Regulation (EU) No 236/2012) (14) One of the conditions that ESMA must meet in order to adopt the measures in this Decision is that the competent authority or authorities have not taken measures to address the threat or have taken measures that do not address the threat in an appropriate manner. (15) The issues of market integrity and orderly functioning and financial stability described in this Decision have led some national competent authorities to consult or take national measures with the aim of limiting short selling of shares. (16) In Spain, the national competent authority, Comisión Nacional del Mercado de Valores, introduced a temporary ban on short selling for 69 shares(6) admitted to trading on several Spanish trading venues. The ban was adopted in accordance with Article 23 of Regulation (EU) No 236/2012 due to a price drop in the relevant shares of more than 10%, and illiquid shares of more than 20%, recorded on 12 March 2020. The ban applied during the trading day of 13 March 2020 and was not extended. (17) In Italy, the national competent authority, Commissione Nazionale per le Società e la Borsa, introduced a temporary ban on short selling for 85 shares(7) admitted to trading on the MTA market of the Italian stock exchange, Borsa Italiana. The ban was adopted in accordance with Article 23 of Regulation (EU) No 236/2012 due to a price drop in shares of more than 10%, recorded on 12 March 2020. The ban applied during the trading day of 13 March 2020 and was not extended. 5 Austria, Belgium, Finland, France, Ireland, Italy, Luxembourg, Netherlands, Germany, Portugal and Spain. 6 https://www.cnmv.es/portal/verDoc.axd?t={2ac24be5-78d8-4360-8199-c181c951e1e9}. 7 http://www.consob.it/web/consob-and-its-activities/news-in-detail/-/asset_publisher/kcxlUuOyjO9x/content/press-release-12march-2020-short-selling-hp/718268.

5 (18) Following these two measures on 13 March 2020, measures followed in Germany, on the Tradegate Exchange, and in the United Kingdom of Great Britain and Northern Ireland(8), where a temporary ban covered 154 instruments. (19) Such temporary restrictions on short selling in accordance with Article 23 of Regulation (EU) No 236/2012 could not eliminate persistent threats because the restrictions applied only for one trading day. (20) After the expiry of the aforementioned temporary measures introduced in Italy and Spain, no further measures were taken in the EU under Regulation (EU) No 236/2012 and as of the date of this Decision no such measures are in force. (21) At the time of adoption of this Decision, no competent authority had adopted measures to increase the visibility of developments in activities related to net short positions by establishing lower reporting thresholds. (22) Given the aforementioned threats at EU level, it has become clear that the information received by national competent authorities under current market stress conditions is insufficient. ESMA considers that lowering the reporting thresholds should ensure that ESMA and national competent authorities across the EU have the best possible set of data at their disposal to monitor market developments and for those authorities and ESMA to take additional measures if necessary. (23) In adopting this measure, ESMA has also taken into account that the new notification threshold will apply immediately after it is published on ESMA's website, as provided for in Article 28(9) of Regulation (EU) No 236/2012.

4. Effectiveness of the measure (in accordance with Article 28(3)(a) of Regulation (EU) No 236/2012) (24) ESMA must take into account the extent to which the measure significantly addresses the identified threats. (25) ESMA has analysed the circumstances at trading venues in recent trading days, particularly from 9 March 2020 [Figure 1], in which the measure poses a threat to market integrity and financial stability of the Union and whether its forward-looking stance measure is effective in addressing those threats. a. The measure significantly addresses the threat to the orderly functioning and integrity of financial markets 8 https://www.fca.org.uk/news/news-stories/temporary-prohibition-short-selling.

6 (26) ESMA considers that despite the extraordinary losses incurred in trading shares on regulated markets since 20 February 2020, particularly from 9 March 2020, the markets are functioning orderly and market integrity is largely preserved. (27) Based on that and today, ESMA considers that this Decision is proportionate to the current circumstances. (28) However, due to the continuous selling pressure caused by subsequent developments affecting an extremely large number of issuers from all types of sectors in all Member States, the markets are nevertheless unstable. (29) Engaging in short selling and increasing short positions during periods of extreme selling pressure and market volatility can amplify the downward trends already present on financial markets. Although in other periods short selling can serve positive purposes in terms of determining the correct valuation of issuers, under current market conditions it is an additional threat to the orderly functioning and integrity of the market. (30) ESMA considers that without taking such a measure at this time, national competent authorities and ESMA would not be able to appropriately monitor the market in the current market environment, where significant selling pressure and unusual volatility [Figure 1] in prices of EU shares admitted to trading on a regulated market could be further amplified by taking short positions. In particular, given the horizontal effect of the current exceptional situation affecting a wide range of shares in the Union, the reason for the drop in share prices could be additional selling pressure arising from short selling activities and the increase in net short positions which, being below the current notification thresholds of national competent authorities, remain unnoticed. (31) Therefore, national competent authorities and ESMA must find out as soon as possible that market participants are engaging in short selling and increasing significant net short positions in order to, if necessary, prevent those positions from becoming signals that could lead to chain sell orders and cause further significant value declines. For the same reasons, ESMA considers it appropriate to maintain the disclosure threshold in Article 6 of Regulation (EU) No 236/2012, but to continuously monitor market conditions and take additional measures if required by market conditions. b. The measure significantly addresses the threat to the stability of the whole or part of the financial system of the Union (32) As previously described, share trading since 20 February 2020, and particularly since 9 March 2020, has been characterised by significant selling pressure and unusual volatility leading to a significant downward spiral affecting issuers from all types of sectors. (33) Unabated selling pressure on shares of banks and other financial institutions and a wide range of issuers from all sectors could expose one or more Member States to risk and ultimately the financial system of the Union. (34) Moreover, ESMA considers that significant value reductions and extreme volatility, particularly since 9 March 2020, may cause a lack of confidence among market participants and the wider public in the functioning of the financial system.

7 (35) The existence of such risks is also evident from several measures taken at Member State and Union level in recent days to stabilise the financial system and the economy as a whole. (36) As previously mentioned, short selling and the increase in significant net short positions can amplify selling pressure and downward trends which at the current moment represent a threat that can produce very harmful effects on financial institutions and companies from other sectors. In this context, the limitation of data for national competent authorities and ESMA would limit their ability to address any possible negative effects on the economy and ultimately the financial stability of the Union as a whole. (37) ESMA's measure of temporarily lowering the reporting thresholds for national competent authorities on net short positions addresses the threat to the stability of parts or ultimately the entire financial system of the Union. c. Improving the ability of competent authorities to monitor the threat (38) Under normal market conditions, national competent authorities monitor any threat that may arise from short selling and the increase in net short positions using supervisory tools established in Union legislation, in particular the reporting obligations on net short positions set out in Regulation (EU) No 236/2012(9). (39) However, due to existing market conditions, it is necessary to enhance the activities of national competent authorities and ESMA to monitor aggregated net short positions in shares admitted to trading on regulated markets. To this end, it is necessary not only to ensure that national competent authorities receive reports at an earlier stage of the increase in net short positions and not only at the current level of 0.2%, but also that such modified reporting obligation enters into force with immediate effect. (40) Therefore, ESMA's measure improves the ability of national competent authorities to address the identified threats and to generally monitor and manage threats to the orderly functioning of the market and financial stability during periods of market stress.

5. The measures do not create a risk of regulatory arbitrage (Article 28(3)(b) of Regulation (EU) No 236/2012) (41) In adopting a measure in accordance with Article 28 of Regulation (EU) No 236/2012, ESMA should take into account whether the measure creates a risk of regulatory arbitrage. (42) Since ESMA's measure relates to reporting obligations by market participants for all shares admitted to trading on a regulated market, it will ensure a uniform reporting threshold for all national competent authorities and will establish equal conditions for market participants from within and outside the Union regarding trading in shares admitted to trading on a regulated market.

9 See Article 5 of Regulation (EU) No 236/2012.

8 6. ESMA's measure does not have a detrimental effect on the efficiency of financial markets, including reducing liquidity on those markets or creating uncertainty for market participants, which would be disproportionate to its benefits (Article 28(3)(c) of Regulation (EU) No 236/2012) (43) ESMA must assess whether the measure has detrimental effects that could be considered disproportionate to its benefits. (44) ESMA considers it appropriate for national competent authorities to closely monitor market developments and any development of net short positions before considering adopting any additional measure. ESMA notes that current reporting thresholds (0.2% of issued share capital) may not be appropriate for timely identification of trends under current exceptional market conditions. (45) Although the increased reporting obligation prescribed by this Decision may further increase the burden on reporting entities, it does not restrict the ability of market participants to take or increase their short positions in shares. Therefore, it will not affect market efficiency. (46) The current measure should not affect liquidity in the market because the increased reporting obligation for a limited group of market participants should not cause a change in their trading strategy, and therefore their participation in the market. Moreover, the purpose of the exemptions provided for market-making activities and stabilisation programmes is not to increase the burden on entities providing an important service in terms of ensuring liquidity and reducing volatility, which is particularly important in the current situation. (47) ESMA considers that limiting the scope of its measure to one or several sectors or to a subset of issuers cannot achieve the desired outcome. The scale of the price drop, the wide range of affected shares (and sectors) and the degree of interconnection among EU economies and trading venues suggest that an EU-wide measure is likely to be more effective than sectoral national measures. (48) As regards the creation of market uncertainty, the measure does not introduce new reporting obligations because lowering the threshold only changes the existing reporting obligation that has been in force since 2012. It applies to all trading of shares admitted to trading on a regulated market and therefore does not create any uncertainty. (49) ESMA also emphasises that the measure is limited to reporting on shares admitted to trading on a regulated market to cover those positions for which additional reporting appears most relevant. The measure applies only if positions reach or exceed the 0.1% threshold after its entry into force. (50) Therefore, ESMA considers that such an obligation of increased transparency cannot have a detrimental effect on the efficiency of financial markets or on investors that is disproportionate to its benefits. (51) As regards the duration of the measure, ESMA considers that a duration of three months is justified given the information currently available. ESMA is aware of the increased administrative burden that this Decision entails for certain market participants and intends to reinstate the regular reporting obligation as soon as the situation improves, but at the same time cannot rule out the possibility of extending the measure if the situation worsens.

7. Consultation and notifications (Article 28(4) and (5) of Regulation (EU) No 236/2012) (52) ESMA consulted with the European Systemic Risk Board (ESRB) and the ESRB did not raise any objections to the adoption of the proposed Decision. (53) ESMA informed national competent authorities of the proposed Decision. (54) ESMA's measure will apply after it is published on its website.

10 ADOPTED THIS DECISION Article 1 Definition For the purposes of this Decision, 'regulated market' means a regulated market as referred to in Article 4(1)(21) of Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU(10).

Article 2 Temporary additional transparency obligations

1. A natural or legal person holding a net short position in the issued share capital of a company whose shares are admitted to trading on a regulated market shall notify the relevant competent authority in accordance with Articles 5 and 9 of Regulation (EU) No 236/2012 of the European Parliament and of the Council if that position reaches or falls below the threshold set for notification in paragraph 2 of this Article.
2. The threshold set for notification is a percentage amounting to 0.1% of the issued share capital of the relevant company and every 0.1% above that threshold.

Article 3 Exemptions

1. In accordance with Article 16 of Regulation (EU) No 236/2012 of the European Parliament and of the Council, the temporary additional transparency obligations in Article 2 shall not apply to shares admitted to trading on a regulated market if the main trading venue of the shares is located in a third country.
2. The temporary additional transparency obligations in Article 2 shall not apply to market-making activities.
3. The temporary additional transparency obligations in Article 2 shall not apply to a net short position relating to the implementation of stabilisation in accordance with Article 5 of Regulation (EU) No 596/2014 of 16 April 2014 on market abuse(11).

10 OJ L 173, 12.6.2014, p. 349. 11 OJ L 173, 12.6.2014, p. 1.

11 Article 4 Entry into force and application This Decision shall enter into force immediately after its publication on the ESMA website. It shall apply from the date of entry into force for a period of three months. Done at Paris, 16 March 2020. For the Board of Supervisors Steven Maijoor Chairman

2 ANNEX FIGURE 1 – ECONOMIC INDICATORS Changes in 1 week from 20 Feb Level Stock market performance Eurostoxx 50 -17% -29% 2,495 US S&P500 -9% -20% 2,711 JP Nikkei -16% -26% 17,431 World -13% -23% 179 European banks -20% -38% 93 IT, financial companies -21% -40% 23 ES, financial companies -24% -38% 62 DE, financial companies -22% -34% 94 FR, financial companies -22% -40% 108 Volatility (in b.b., level in %) VSTOXX 31 60 74.3 VIX 16 42 57.8 Credit default swap contracts (in b.b.) Europe, non-financial companies 36 61 101 Europe, high yield 123 303 501 Europe, financial companies 40 87 131 Europe, subordinated debt of financial companies 52 142 240 10-year (10Y) government bonds (in b.b., level in %) DE10Y 14 -14 -0.59 IT10Y 73 89 1.81 US10Y 25 -57 0.95 GB10Y 18 -17 0.41 JP10Y 14 4 0.00 N