Short selling bans
Under the Short Selling Regulation (SSR),1 EU national regulators can ban the short selling of shares where adverse events or developments constitute a serious threat to financial stability.
As a result of the volatility caused by the pandemic, several EU regulators have banned short selling in some or all shares admitted to trading on venues within their jurisdictions. The relevant EU national regulators imposing a ban are those in Austria, Belgium, France, Greece, Italy and Spain. The bans are currently effective and will last for between one and three months.
Further details on the application, exemptions and timeframes for those regulators’ bans can be found on the FCA’s website.
In March, the FCA released a statement noting that it will also ban short selling in the shares identified by the relevant EU regulators in order to support those EU regulators. The FCA will continue to follow this policy unless the FCA considers that its assistance to those EU regulators is not necessary. Notably, the FCA sets a high bar on imposing any bans on the short selling of UK shares, but cannot rule out imposing such a ban.
Short selling position reporting threshold amendment
The SSR2 requires holders of net short positions in shares traded on an EU regulated market to notify the relevant EU national regulator in the event that the holder’s net short position exceeds 0.2 per cent of the issuer’s share capital, and for every 0.1 per cent increase above that threshold.
In March, ESMA issued a decision temporarily lowering the 0.2 per cent threshold to 0.1 per cent until 16 June 2020.
The Decision applied immediately to any person, irrespective of their country of residence. The Decision does not apply to shares admitted to trading on a regulated market where the principal venue for the trading of the shares is in a third country; neither does it apply to market making or stabilisation activities.
The FCA issued a statement providing that its systems will be able to accept notifications at the lower threshold from Monday 6 April 2020. However, firms will not be required to amend and resubmit notifications submitted to the FCA between 16 March and 3 April 2020.
The Decision does not affect the public disclosure requirements of the SSR.
Regulatory capital-related reliefs
Supranational and local regulators have also announced a comprehensive package of measures to provide relief to banks, with the objective of encouraging banks to lend to the real economy. Set out below are those measures aimed at providing banks with relief from regulatory capital obligations; this alert does not focus on any additional supervisory and prudential policy measures taken by regulators.3
The Basel Committee on Banking Standards (BCBS)
- On 27 March 2020, the BCBS issued a press release setting out a summary of the revised implementation timeline of the outstanding Basel III standards. Under this revised timeline, certain standards which were due to be implemented by 1 January 2022 have been pushed back a year to 1 January 2023. These include the following revised standards: the leverage ratio framework and the globally systemically important buffer; standardised approach for credit risk; the internal ratings based approach for credit risk; operational risk framework; credit valuation adjustment framework; market risk framework; Pillar 3 disclosure framework; and the output floor, in relation to which the transitional arrangements have also been extended by a year from 1 January 2027 to 1 January 2028. On 2 April 2020, the PRA and HM Treasury issued a statement welcoming the deferral.
- On 3 April, the BCBS published technical clarifications to ensure that banks reflect the risk-reducing effect of any government-backed COVID-19 measures when calculating their regulatory capital requirements. The technical clarifications provide complementary guidance to the EBA’s Final Report and the EBA’s Statement (see below) and relate to the credit risk treatment for government-backed loans. Further, the BCBS clarifies that, in respect of expected credit loss accounting under IFRS 9 (ECL), relief measures should not automatically result in exposures moving from a 12-month ECL to a lifetime ECL, and banks should use the flexibility inherent in IFRS 9, giving due weight to long-term economic trends. Further, the BCBS will also amend its transitional arrangements for the regulatory capital treatment of ECL accounting in order to provide greater flexibility in how to phase in the impact of ECL on regulatory capital.
The European Central Bank (ECB)
- On 12 March 2020, the ECB announced measures to ensure that its directly supervised banks can continue to fulfil their role in funding the real economy:
- Banks can fully use capital and liquidity buffers to operate temporarily below the level of capital defined by Pillar 2 Guidance, the capital conservation buffer and the liquidity coverage ratio; each of these measures complements the release of the countercyclical capital buffer, as relevant.
- Banks are able to partially use capital instruments that do not qualify as Common Equity Tier 1 capital to meet the Pillar 2 requirements. In effect, this brings forward a measure that was initially scheduled to come into effect in January 2021 as part of the EU’s implementation of the Basel III standards.
The ECB is discussing individual measures with banks, such as adjusting timetables, processes and deadlines.
The European Banking Authority (EBA)
- On 3 April 2020, the EBA published its final report (EBA Final Report) following its 25 March 2020 statement (EBA Statement), which should be read alongside the 3 April 2020 BCBS statement of measures (see above). The EBA Final Report contains guidelines on moratoria on loan repayments that have been applied as a result of the pandemic. The guidelines clarify that, among certain other criteria, payment moratoria do not trigger classification as forbearance or distressed restructuring if the measures taken are based on the applicable national law or on an industry or sector-wide private initiative agreed and applied broadly by relevant credit institutions. Those institutions must collect information about the scope and effects of the use of the moratoria to enable effective monitoring of the effects of the pandemic. The guidelines apply from the date of translation into all EU languages.
- For the purposes of IFRS 9 and the definition of default, the EBA Statement also provides that the EBA is of the view that the public and private moratoria, provided they meet the criteria set out in the EBA Final Report, do not automatically classify as forbearance measures in an accounting sense.
The Bank of England (BofE)
- On 11 March 2020, the BofE announced the release of the UK countercyclical capital buffer. This aims to support the ability of banks to supply credit by reducing the UK countercyclical capital buffer rate to 0 per cent of banks’ exposures to UK borrowers with immediate effect. The rate had been 1 per cent and was due to reach 2 per cent by December 2020. It is likely that the 0 per cent rate will be maintained for at least 12 months. The BofE notes that the release of the countercyclical capital buffer will support up to £190 million of bank lending to businesses.
- On 30 March, the PRA issued two statements:
- The first relates to calculating exposures under the internal models method (IMM) for counterparty credit risk. The PRA is aware that some firms have experienced significant moves in Capital Requirements Regulation (CRR) risk-weighted assets. It understands that these moves are partially attributable to large margin calls following significant intraday market price movements that have arisen from financial market volatility. The PRA provides clarification that the CRR4 does not preclude firms using the IMM from measuring the exposure value including collateral which has not yet settled at the time of calculation.
- The second relates to its approach to value-at-risk (VAR) back-testing exceptions to mitigate the possibility of excessively pro-cyclical market risk capital requirements. Firms are allowed, on a temporary basis, to offset increases due to new exceptions through a complementary reduction in risks-not-in-VAR capital requirements. This approach will be reviewed by the PRA after six months.
Our Reed Smith Coronavirus team includes multidisciplinary lawyers from Asia, EME and the United States who stand ready to advise you on the issues above or others you may face related to COVID-19.
For more information on the legal and business implications of COVID-19, visit the Reed Smith Coronavirus (COVID-19) Resource Center or contact us at COVID-19@reedsmith.com
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See article 20 of Regulation (EU) No. 236/2012.
- See article 5 of the SSR.
- See here for a summary of the BofE’s measures.
- Regulation (575/2013).
Client Alert 2020-223
