Asset management firm BlackRock has warned that new European legislation requiring public disclosure of short-selling positions will lead to a herd mentality of increased shorting and potentially increased market volatility.
“Publication of the positions of those seen as ‘star’ managers will inevitably lead others to follow suit,” read BlackRock’s response to a consultation by pan-European watchdog the European Securities and Markets Authority (ESMA). “Since it will not be known if the ‘star’ manager took his position based on a view of the issuer’s underlying financial condition or merely to hedge a long position in another stock, herding by others may exacerbate the negative impact on the price of short selling and could encourage volatility.”
Under the new rules, investors must disclose to regulators significant net short positions in shares when they reach 0.2% of issued share capital. At 0.5% of issued share capital, investors must make disclosures to the entire market. The European Commission believes better disclosure will help financial watchdogs better monitor developing risk.
ESMA, which is required to devise by 31 March the detailed technical standards to accompany the new rules, had asked for feedback on how credit default swaps should be used, thresholds for reporting net short sales, thresholds for restrictions on short selling of public debt and the handling of adverse events.
BlackRock, which manages €2.6 trillion in assets worldwide, said to avoid media scrutiny, protect management strategies, or to avoid ‘issuer retaliation’, some managers would likely limit their net short positions at the level required to stay below the 0.5% threshold.
The buy-side firm said the new rules would expose the proprietary management strategies of named position holders, leaving their short positions susceptible to reverse engineering and open to short squeezes – where other market participants move against large short positions.
“This puts the seller under extreme pressure to close out the position in a rising market,” said BlackRock.