August 12, 2011 11:06 am

Long-term effect of bans will be limited

The short-selling bans across four markets in Europe – Italy, Spain, Belgium and France – apply not to all stocks but to banks and many insurance companies in each country.

The prohibitions are aimed at traders who borrow shares to sell them in the expectation the price will fall, allowing the seller to profit from that fall before they have to return them to the lender. In normal markets, this is generally held to add to liquidity in the market, but some policymakers fear that in the sort of wild markets seen in recent days, “shorts” can exacerbate price falls.

The aim of the ban is to tame the wild swings in banks stocks – especially French banks stocks that have exacerbated much of the volatility in global share trading in the last two days.

Short-selling bans tend to produce dramatic short-term effects by forcing investors with short positions to buy back that stock. The long-term effects however are limited; a series of bans on shorting bank stocks that followed the collapse of Lehman Brothers around the world did little to halt the long-term decline of institutions’ shares.

Bans also tend to differ from country to country reflecting regulators’ preferences and the market practices of each. This tends to exacerbate the early effect as investors are forced to step back altogether as they factor in the complex technical details of the rules across all their operations.

In this instance, while all four countries have applied them to shares, France and Belgium have said certain derivatives used to hedge equities deals are still allowed, while Spain appears to have extended its ban to derivatives.

France has banned trading in index derivatives – for example a futures contract on an underlying stock index, like the CAC-40 index – “unless the resulting net short positions in the securities concerned are offset by long positions”. Such derivatives are typically traded on exchanges.

But no mention has been made by any regulator of off-exchange derivatives, like credit default swaps, which are used to buy insurance against corporate defaults.

Further uncertainty exists over whether traders using alternative trading platforms like Chi-X Europe are affected. Such platforms emerged in 2007 and offer pan-European trading, including in shares traded on Spanish, Italian, Belgian and French markets – yet are regulated by the UK watchdog which has so far resisted any ban.

The UK’s Financial Services Authority said on Friday: “In terms of venues etc, our understanding is that all the measures introduced today are intended to apply to the shares effected, irrespective of where or on which platform they are traded. However, as was the case with the German measures last year, market participants need to understand that the FSA cannot provide guidance on the application of rules imposed by other regulators and that it is necessary for them to go direct to those authorities if they are not clear about applicability or interpretation”.

The French ban stipulates: “Before selling, the investor must make sure that the quantity of securities sold does not create or increase a net short position.

“Opening a net short position during the trading day is prohibited, even if the investor intends to close the position before close of business on that day.”

In Belgium the ban covers four banks: KBC, Ancora, Dexia and Ageas.

France has banned short-selling in BNP Paribas, Société Générale, Crédit Agricole, Natixis, Axa, April Group, CIC, CNP Assurances, Euler Hermes, Paris Re and Scor.

In Spain the ban applies to Santander, BBVA, Sabadell, Bankinter, Banco Popular, Banca Civica, Banco de Valencia, Banesto, Banco Pastor, Bankia, Caixabank, CAM, Grupo Catalana de Occidente, Mapfre, BME and Renta 4.

Italy’s ban covers 29 financial institutions, including banks and insurers such as Generali.

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