COVID-19 Updates 5/18

Short Selling Restrictions

Consistent with MFA recommendations, France (AMF), Spain (CNMV), Belgium (FSMA), Austria (FMA), Greece (HCMC), and Italy (CONSOB) announced in a coordinated fashion that their short sale bans will terminate today. This is a positive development, especially as the Italian decision to curtail its ban was unexpected.  MFA will continue to actively engage with all relevant authorities to address several lingering concerns, including the temporary lower reporting threshold for short sale positions. ESMA reaffirmed today that its March 16 decision to temporarily require holders of net short positions to notify the relevant regulator if the position reaches or exceeds 0.1% of the issued share capital (normally 0.2% under the Short Selling Regulation) will remain in force until June 16, with an option for ESMA to renew it.

Fed Financial Stability Report

MFA continues to engage reporters and policymakers on the contention in Friday’s annual Federal Reserve Market Stability report that hedge fund leverage is at “elevated levels”, increasingly concentrated and partially responsible for March market stresses. Politico and Bloomberg today posted stories including a quote from MFA President and CEO Bryan Corbett pushing back on that argument: “Like all investors, hedge funds were subjected to severe market dislocations in March and they responded by reducing their investments. These unforeseeable dislocations caused lenders and investors to pull back and exacerbated market pressures. No single market participant caused strain in the markets, which are subject to a range of institutions with varying liquidity and risk profiles.”

CFTC Staff Guidance

On May 13, the CFTC issued a Staff Advisory in the wake of unusually high volatility and negative pricing experienced on April 20 in the May 2020 physically-delivered WTI contract, and related reference contracts, reminding exchanges, futures commission merchants (FCMs) and clearinghouses of their obligations to assess changing market conditions and take appropriate measures in response as contracts approach expiration.  We understand the CFTC has been very engaged in reviewing and assessing the April 20 market dislocation and believe that the Commission remains deeply concerned that current economic conditions create the potential that certain contracts may experience significant price volatility, and that negative pricing continues to be a possibility.  Among the reminders, the CFTC raised the obligation of: (1) exchanges to prevent market disruption, adopt position limits, protect market participants; (2) FCMs to engage in robust risk management and provide customers with risk disclosures; and (3) clearinghouses to engage in robust risk management testing.