The Monte Dei Paschi Affaire. Distressed Banks and the European Regulation on Short Selling

Abstract

The European Regulation on short selling (SSR) has been applied to restrict hedge funds from short selling the stock of Monte dei Paschi di Siena (MPS) as part of a distressed securities strategy. In the MPS case, a distressed securities strategy was carried out based on short selling, despite the adoption of a temporary ban on short selling by means of purchasing put options from a market maker. Article 23 of the SSR provides that the national competent authorities (NCAs) may prohibit or restrict the execution of short sales in the event of a decrease in price by a given percentage during a single day’s trading for a given financial instrument. The temporary ban on short selling adopted by the NCAs or the ESMA under the SSR can be circumvented by means of an indirect use of the market making exemption. When adopting the ban and conceding the market making exemption, we take the view that the NCAs and the ESMA should require market makers to prohibit investors from increasing their net short positions in the focal stock.

Keywords: Monte dei Paschi, Short Selling, ESMA, NCAs, put options, market makers, SSR, hedging, hedge funds, private funds, speculation, systemic risk, Regulation SHO

JEL Classification: K20, K23, K32, L43, L5, O31, O32