COVID-19 | Short Selling Bans | SFTR Back loading | ISLA Best Practice Handbook
For most of you reading this in your homes, the past two weeks have been some of the most radical in terms of changes in your working lives that you we will have ever experienced. Entire industries and businesses have effectively relocated or dispersed in response to the global COVID-19 pandemic. During these unprecedented times, we are all showing incredible resilience and flexibility as we work to ensure compliance with the various health guidelines to limit the spread of the virus.
Although our personal and business priorities at the moment rightly centre on the health and wellbeing of our families and wider communities, including the most vulnerable, there is an opportunity to glimpse at what a post-pandemic business world might look like. Many preconceptions, especially around the effectiveness of remote or home working are being swept away at the moment, and this raises important questions around the future form and structure of our traditional office environments. We are all becoming increasingly familiar with video and web conferencing applications, that are now suddenly seen as fundamental to keep a business functioning. It will be difficult to see how firms will go back to life before COVID-19, especially if they see significant cost-savings and efficiencies associated with the need for less core office space and even travel. Sometimes a change of this magnitude happens without any of us realising it; this might be one of those moments.
As global stock markets have reacted to the crisis, we have seen regulators respond with an array of fiscal stimulus packages designed to protect their economies, whilst providing financial cushions for workers forced to isolate. These measures have perhaps inevitably included the imposition of temporary bans on short selling activities.
There is no doubt that the topic of short selling can cause considerable debate amongst a broad array of market participants and politicians. Short selling is a topic that is rooted in economic behaviour that, as you will all know from the previous financial crisis, can easily transcend into the political arena, particularly at times of market stress. There is a long history of academic research that tends to suggest that the disadvantages associated with short selling bans tend to outweigh the advantages. Inevitably however, this is not always clear cut. In the past two weeks, we have seen a number of European national competent authorities (NCAs) introduce temporary bans on short selling, whilst the FCA in the UK has taken a different view, publicly supporting the role that short selling plays in facilitating effective price discovery and efficient markets.
The COVID-19-led crisis is perhaps something different, with a global health emergency potentially changing investment and economic fundamentals, rather than the historically more familiar economic or politically driven events. As markets have fallen rapidly as a result of economic fears associated with the virus, we have seen long-only managers actively sell investments as the fundamentals around these investments have changed. There is no doubt that we have also seen short sellers active as these markets have fallen. However, I feel the key questions are: what is leading these price spirals? Is this activity being induced by short sellers, or are they simply following the market and seeking opportunities accordingly?
The answers may be somewhat dependant on which side of the debate you stand on. A cursory look at how markets have performed in the past few days tends to suggest that the big swings we are seeing across all developed equity markets appear to be driven more by broad investor sentiment, rather than the activity of short sellers. Interestingly, the shape of the performance curves in those markets that have seen bans versus those that remain unencumbered, look almost identical. A good example of this is to consider how the FTSE 100, the S&P 500 and the CAC 40 have performed in the past month. All of these markets recorded lows around 18 March, with further notable lows on 23 March. In line with a general rise in sentiment in the past few days, all of these indices have risen. However, it is interesting that both the FTSE and the S&P have tended to fall less and recover more strongly than the CAC. There could of course be multiple and complex reasons for these differences, but the potential absence of market liquidity often seen following a ban in short selling could be a factor here. From this albeit unscientific and anecdotal review, recent events tend to look as if investment fundamentals are driving the market at the moment, and this is no more than a somewhat extreme traditional market sell off.
Just as I am writing these remarks, I have just seen the announcements from ESMA and the NCAs regarding the rolling impact that COVID-19 is having on SFTR implementation. The decision to deprioritise backloading of data seems to me to be a pragmatic and sensible step to take at this time. Whilst it will ease the data burden on members, it will not in my view materially undermine the overall aims and objectives of the regulation.
This week has also seen the launch of our new ISLA Best Practice Handbook. Based on the findings and outputs of our various working groups and ISLA-led initiatives, the ISLA Best Practice Handbook will allow members and non-members to access general and topic specific guidance in a more dynamic-style access. Their objective is to assist firms in the implementation of sound policies and processes within the relevant securities lending market area. Whilst we have initially gone live with SFTR, over the coming weeks and months you will find additional versions, including general best practice.
In closing, I hope that you, your families and friends are safe and well during what is a very challenging period for us all.
Andrew Dyson, CEO