Regulatory Outreach for Student Education

Engaging Students in the Debate Over Financial Services Reform

Today’s debate over regulatory reform is a watershed activity in the careers of financial industry professionals. Years ago, similar debates over mandated pre-funding of pension liabilities (ERISA) and the reunification of investment banking with commercial banking (Glass Steagall's repeal) changed the direction of financial market evolution. Opinions may differ on the merits of those changes, but no one disputes their significance.

Without question, college students and young professionals should be well-versed in the issues involved in today's debate. The Regulatory Outreach for Student Education (ROSE) program is the Center's way to give top students, tomorrow's business and finance leaders, opportunities to experience the financial regulatory process up-close.  The ROSE program is designed to put students in touch with the regulators, policy-makers, and industry leaders who are currently shaping the financial regulatory landscape.  We then challenge them to research and articulate their own positions on the most intriguing and interesting issues.  

ROSE Program Blog

Friday, August 12, 2011

Belgian Regulator Bans Short Selling of Bank Securities


Author: David Schwartz J.D. CPA David Schwartz J.D. CPA

In reaction to high volatility in the financial markets, on August 11, 2011, the Belgian Financial Services and Markets Authority (FSMA) banned shorts selling on of shares of certain Euronext Brussels listed banks and financial institutions.  The FSMA also banned short selling of related derivatives.  

The FSMA’s new rules:

  • Prohibit "uncovered transactions" in shares issued by certain financial institutions listed on Euronext Brussels and in related derivatives. Coverage of shares through derivatives is not permitted, and “covered shorting,” coverage with borrowed securities, is no longer considered sufficient coverage;
  • Require disclosure of net short positions representing an economic interest greater than 0.25% of the capital of one of the financial institutions as measured by the FSMA and the market. "Net economic short position" is defined under the new rules as any instrument (contracts for differences, options, spread bets, equities, etc.) giving rise to an exposure, whether direct or indirect, in the equity share capital of a company; and
  • Requires qualified intermediaries to take reasonable measures to ascertain that their clients have appropriate coverage for their proposed transactions. As stated above, the new rules, "appropriate coverage" is defined in such a way that coverage through derivatives is not sufficient.  Under the new rules, coverage must consist of the securities that have been sold, or of the securities to which the transaction in derivatives relates.



In essence, the new rules prohibit actors from taking by any method a "net economic short position" (i.e. any instrument giving rise to an exposure, whether direct or indirect, in the equity share capital of a company) or to extend such a position to the shares of one of the covered financial institutions.

A partial list of affected financial institutions includes:  Dexia SA, Ageas NV/SA, KBC Groep NV, and KBC Ancora Comm.

A Q&A document issued by the FSMA elucidates some exceptions:
  • Market makers on the derivatives market and liquidity providers on the cash market (as defined by the Rulebook of Euronext) and financial intermediaries (licensed banks and investment companies) that are usually active as market makers on OTC markets (cash or derivatives market) are exempt from the short sale prohibition;
  • Block trade counterparties are also exempt. Financial intermediaries (licensed banks and investment companies) may sell blocks to their clients without having the securities at hand. When a client wants to sell a block to his intermediary, however, the latter must ascertain that his client has appropriate coverage; and
  • The measures described above do not apply to covered short selling. Art. 25, 2° of the Law of August 2, 2002 remains in force, however, making it illegal to execute transactions or issue orders to trade: a) which give, or are likely to give, false or misleading signals regarding the supply of, demand for or price of one or more financial instruments; or b) which secure, by a person, or persons acting in collaboration, the price of one or more financial instruments at an abnormal or artificial level, unless (in either a) or b) the person who entered into the transactions or issued the orders to trade establishes that his reasons for doing so are legitimate and that these transactions or orders to trade conform to the normal practices which apply on the market concerned and are recognised as such by the FSMA.



The FSMA’s ban was instituted at the same time as similar, but temporary, bans by Italy, Spain, and France.  Belgium has announced that it will keep its ban in place for the near term, and will be lifted, “as soon as market conditions allow it and, to the extent possible, in a coordinated way.”
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