16 September 2020

ESMA70-155-11072

ESMA DECISION

of 16 September 2020

renewing the temporary requirement to natural or legal persons who have net short positions to lower the notification thresholds of net short positions in relation to the issued share capital of companies whose shares are admitted to trading on a regulated market to notify the competent authorities above a certain threshold in accordance with point (a) of Article 28(1) of Regulation (EU) No 236/2012 of the European Parliament and of the Council

THE EUROPEAN SECURITIES AND MARKETS AUTHORITY BOARD OF SUPERVISORS,

Having regard to the Treaty on the Functioning of the European Union,

Having regard to the Agreement on the European Economic Area, in particular Annex IX thereof,

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), 43(1) and 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(1) 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 with regards to definitions, the calculation of net short positions, covered sovereign credit default swaps, notification thresholds, liquidity thresholds for suspending restrictions, significant falls in the value of financial instruments and adverse events(3), and in particular Article 24 thereof,

Having regard to the Decision (EU) 2020/525 of 16 March 20204 of the European Securities and Markets Authority (ESMA), requiring natural or legal persons who have net short positions to temporarily lower the notification thresholds of net short positions in relation to the issued share capital of companies whose shares are admitted to trading on a regulated market above a certain threshold to notify the competent authorities in accordance with point (a) of Article 28(1) of Regulation (EU) No 236/2012,

Having regard to the Decision (EU) 2020/1123 of 10 June 20205 of the European Securities and Markets Authority (ESMA), renewing the temporary requirement to natural or legal persons who have net short positions to temporarily lower the notification thresholds of net short positions in relation to the issued share capital of companies whose shares are admitted to trading on a regulated market to notify the competent authorities above a certain threshold in accordance with point (a) of Article 28(1) of Regulation (EU) No 236/2012,

  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.
  4. OJ L 116, 15.4.2020, p. 5-13.
  5. OJ L 245, 30.7.2020, p. 17-30.

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Whereas:

    1. Introduction
  1. With Decision (EU) 2020/525, ESMA required natural or legal persons with net short positions in relation to the issued share capital of companies whose shares are admitted to trading on a regulated market to notify the competent authorities details of any such position reaching, exceeding or falling below 0.1% of the issued share capital in accordance with point (a) of Article 28(1) of Regulation (EU) No 236/2012.
  2. The measure imposed by the ESMA Decision (EU) 2020/525 addressed the necessity for national competent authorities and ESMA to be able to monitor the net short positions that market participants have entered into in relation to shares admitted to trading on a regulated market, on account of exceptional circumstances present in financial markets.
  3. With the Decision (EU) 2020/1123 of 10 June 2020, ESMA renewed the temporary requirement since, notwithstanding a partial recovery of the EU financial markets from the losses registered since the outbreak of the pandemic, the outlook for a future recovery remained uncertain and threats to the orderly functioning and integrity of financial markets and the stability of the financial system were still present.
  4. In accordance with Article 28(10) of Regulation (EU) No No 236/2012, ESMA has to review this measure at appropriate intervals and at least every three months.
  5. ESMA performed this review based on an analysis of performance indicators, including prices, volatility, credit default swaps spread indices, as well as the evolution of net short positions, especially those between 0.1 and 0.2%. Pursuant to the conducted analysis, ESMA has decided that it should renew the measure for an additional three months.
    1. Ability of the measure to address relevant threats and cross-border implications (Article 28(2)(a) of Regulation (EU) No 236/2012)
      1. Threat to the orderly functioning and integrity of the financial markets
  6. The COVID-19 pandemic continues to have an adverse impact on the real economy with the overall outlook for a future recovery remaining uncertain, particularly in light of recent developments in the EU and beyond. ESMA notes that the number of COVID-19 cases has significantly increased in several jurisdictions over the last few weeks, raising concerns about the possibility of a second wave of COVID-19 infections exacerbating the uncertainty of any future outlook.
  7. Equity markets in the EU, as demonstrated by the Eurostoxx 50 Index, lost 14% in the period between the 20th of February and the 3rd of September 2020, compared to a loss of value of 13% between the 20th of February and the 4th of June [Figure 1]. There was a significant improvement of the Eurostoxx 50 Index with respect to the levels reached in March (where the drop was of approximately 30%, compared to February 2020, as indicated in ESMA Decision (EU) 2020/525) but without recovering to pre-COVID-19 levels.

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  1. The volatility measured by the VSTOXX6 also remains relatively elevated compared to February 2020. The level measured in September (+15%) is slightly higher than the one in June (+13%). The same is also true, and even to a larger extent, for the VIX7 (+18% in September against +9% in June) [Figure 1] and [Figure 2].
  2. The level of credit default swaps (CDS) has decreased between 17% and 28% from 4 June to 3 September [Figure 1]. However, to better understand the informative power of CDSs at this moment, the data has to be assessed in the context of the European Central Bank's (ECB) decision on the Pandemic Emergency Purchase Programme (PEPP). From the beginning of March, the CDS spreads started to be highly volatile and indicative of a high financial risk. The renewal by ESMA of the decision (EU) 2020/525, based on data up to 4 June, was also based on the fact that CDS spreads were high and volatile at that time and were considered as an indication of the perception of risk in the market.
  3. However, the increase of the PEPP by a further EUR 600 billion decided on 4 June brought the ECB's total announced monetary stimulus to EUR 1.35 trillion, reducing the informative value of CDS spreads in relation to the risk perception of the market.
  4. Similar considerations can be made in relation to the informative value of the sovereign bond markets, which, as in the case of CDS spreads, are affected by the monetary policy of the central banks. As it appears in [Figure 1], the 10Y government bonds yields of DE, FR, GB and IT show a decrease with respect to June levels on average by 22 basis points.
  5. As a consequence, ESMA considers that the evolution of stock markets, which is significantly less impacted by the central banks' monetary policy, should provide better insights to the current level of risk in EU financial markets.
  6. Similar to the Eurostoxx 50, the STOXX EUROPE 800 excluding Switzerland Index lost approximately 17% since 20 February 2020, compared to a drop of 16% in June. The STOXX Europe Total Market Banks (ref. European banks) decreased by 37% since February, while in June the loss was of approximately 30%.
  7. As mentioned in ESMA's Report on Trends, Risks and Vulnerabilities No. 2 of September 2020 (TRV), in Q2 2020 there were signs of differentiation across sectors, affecting in particular credit institutions. As of end-June, EU airlines and banking sector indices were still 36% and 30%, respectively, below their early January levels. Furthermore, [Figure 3] shows that the banking and the insurance sectors have been rather stable since June, but the performance between 20 February and 3 September compared to the one between 20 February and 4 June shows a deterioration: -38% vs. -33% for the banking sector and -
  1. The VSTOXX measures the implied volatility based on the Eurostoxx 50 option prices.
  2. The VIX Index is calculated by using the midpoint of real-time S&P 500 Index (SPX) option bid/ask quotes.

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European Union published this content on 28 October 2020 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 28 October 2020 18:19:02 UTC