Hedge funds and other investors will have to give regulators more information about the bets they are taking, the European Union’s markets watchdog announced on Monday, warning that a markets slump triggered by the coronavirus could last weeks.
The European Securities and Markets Authority (ESMA) said it has lowered the threshold for reporting short-selling to regulators as current trading conditions pose a “serious threat” to market confidence.
“There is a clear risk that such downward trend will continue in the coming days and weeks,” ESMA said.
In short-selling, traders borrow a company stock with a view to selling it, hoping to buy them back later at a lower price and pocket the difference.
When the number of short-sellers outweighs those interested in buying the stock, which could happen if investors rush to sell amid panic over coronavirus, that can further drive down the price of shares.
Under the new regime, short-sellers must report a transaction if their net short position reaches or exceeds 0.1% of the issued share capital, compared with 0.2% before Monday’s announcement.
The tougher reporting requirement apply to trading positions as of close of trading on Monday.
“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,” ESMA said.
“The measure can support more stringent action if required to ensure the orderly functioning of EU markets, financial stability and investor protection.”
Regulators in Spain and Italy imposed short-selling curbs last week but stock indexes on Monday continued their slide.
Under EU law, national authorities have the power to introduce such bans. They are required to inform the EU umbrella body, the European Securities and Markets Authority.
Many countries curbed short-selling in the aftermath of the 2008 financial crisis. While such bans can soften the impact of a shock, however, experts say they only work for a limited time and have little impact on the overall market.
Under EU rules, hedge funds and others who engage in short selling have to notify the markets watchdog when they take bigger short positions.