August 16, 2011
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As the Euro Debt Crisis deepens, France, Belgium, Italy and Spain have all taken the seemingly last ditch effort of banning short sales of their stocks and other stock related items….
That last part is the kicker for those of us in the managed futures world. Would these bans impact futures contracts for the indices in the given countries? A partner in Spain has told us that it sure did, with Spain’s largest futures clearer- Interdin- banning short trades on the Spanish Index and Euro Stoxx 50 futures effective last Friday.
Fast forward to yesterday, when two of the largest clearing firms in the industry- Newedge and MF Global- sent out advisory notices to their clients on the subject. MF Global essentially recommended clients stop all short selling of European stock index futures, while Newedge took a little different approach by laying out the facts and concerns, then saying you’re on your own (with a friendly reminder that they have redress on you via your account agreements).
What’s it all mean? Our understanding of it is that, while European brokers, in particular, are being limited in their sales, it is otherwise up to the discretion of the clearing firms (and in turn individual clients) as to whether to abide by the short selling restrictions or not. It would seem that the Europeans would have disallowed Eurex from accepting any short orders if they really wanted to kill this, but instead they put the burden of compliance on those doing the actual trading.
What happens if your manager utilizes European stock index futures and runs afoul of the European regulators? Does that fall on them, or you? Good question, and not something we’ve seen laid out in D-Docs or elsewhere – as futures have been exempt from these types of bans in the past. And what if you already have short positions, like many systematic multi market programs which have been short foreign stock indices for over a month? Finally, what the penalty is for not abiding?
All in all, there are more questions than answers at this point, but we’re on the case and will be digging for answers. In the meantime, we’ll have to echo Newedge and just advise being careful if these are in your portfolio of markets.
PS – What will the impact of these bans be? The answer here is also unclear- largely because we haven’t been here before. The last short sale ban (in 2008 in the U.S.) did not impact the futures industry, so there’s no precedent to turn to for guidance. Zerohedge, however, had an eerie comparison to make last week:
There are those who say the upcoming short selling ban in all stocks in Italy and France, which according to CNBC will take place as soon as after the close today, or in one hour, will be beneficial to stocks. Then there are facts. To those who may have forgotten, on September 18, the SEC banned the shorting of all financials here in the US. Below is a chart of the carnage that ensued… The same chart is coming to Europe first. End result: 48% drop in under a month.
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August 17, 2011
Volume today in ESTX50 is running around 1.3 million contracts. It does not appear that the big guns are too concerned about the short ban on stocks in Europe.