Financial Stability Report - Financial Risk and Stability Network

48
THE NEW EUROPEAN REGULATION ON SHORT SELLING
e new European regulation on short selling (Regulation EU 236/2012 of the European
Parliament and of the Council of 14 March 2012), which came into force on 1 November
2012, is intended to reduce the risks for nancial stability that can derive from the short selling
of shares and sovereign debt securities. To this end, investors, including those not resident in
the European Union, are required to notify the competent authorities of any signicant net
short positions they hold in such securities (created by trading on the cash market or by using
derivatives) and may not make uncovered short sales. e regulation also forbids purchases
of CDS on sovereign issuers in the absence of an exposure towards the underlying country.
Lastly, as part of the new harmonized regulatory framework, authorities may temporarily forbid
short selling in exceptional circumstances, such as conditions of extreme volatility or threats to
nancial stability.
To date the regulation does not appear to have had a signicant adverse eect on the liquidity
of the secondary market in government securities (Figure 4.7); the net notional volumes of CDS
on Italian sovereign debt have also held up, in line with the trend of the segments not subject
to restrictions (Figure A). e exemption of government securities primary dealers and market
makers from the restrictions and notication requirements may have been a factor. On the other
hand, the regulation may have had a major impact in the market for the indices on European
sovereign CDS. For instance, the fall in the net notional volumes on the Markit iTraxx SovX
Western Europe index between the spring and summer of 2012 may have been partly due to the
requirement for holders of CDS indices to maintain exposures towards all the countries in the
index, a condition that was presumably complied with by only a few and that may have led to
the liquidation of some holdings before the regulation came into eect.
e new regulation has not imposed restrictions on activity in futures markets: investors may
therefore continue to take short positions on such contracts (including on sovereign securities)
without any restrictions. e increase in the volumes traded on the 10-year BTP futures market
(Figure B) may have been due to transactions being shifted from markets on which the regulation
has imposed restrictions.
30
25
20
15
10
5
0
2009
CDS on Italian reference entities:
net notional volumes (1)
(weekly data; billions of dollars)
ntry into force
of the regulation
2010 2011 2012
Figure A Figure B
2013
Republic of Italy Banks
Non-banks SovX WE (right-hand scale)
Source: Based on Depository Trust & Clearing Corporation data.
(1) The reference entity is the issuer of the security underlying the CDS.
Of the instruments shown in the gure only CDS on the Republic of Italy
and the iTraxx SovX Western Europe index are subject to the restrictions
imposed by the regulation.
18
15
12
9
6
3
0
115
110
105
100
10-year BTP futures:
volumes, open interest, prices
(daily data; per cent and number of contracts)
Financial Stability Report No. 5, April 2013 BANCA D’ITALIA
95
Entry into force
of the regulation
2012
Volume (1) Open interest (1) Price (2)
2013
120,000
90,000
60,000
30,000
Source: Based on Thomson Reuters Datastream data.
(1) Right-hand scale; the open interest is the sum of all the futures contracts
with the nearest maturity still open at a given date. − (2) Left-hand scale.
0