Italian CONSOB Introduces Emergency Short Selling Ban Following ECB Stress Tests

Italian financial regulator CONSOB (Commissione Nazionale per le Societa e la Borsa) announced today that it is introducing a temporary short selling ban on shares of Italian banks Banca Monte dei Paschi di Siena SpA (BIT:BMPS) & Banca Carige SpA (BIT:CRG), which both lost substantial value in trading today along with the broad Italian stock market after the results from stress testing revealed a capital shortfall.

The practice of banning short selling has been widely used throughout the financial crisis triggered after the fall of Lehman Brothers which resulted in a global market rout lasting several months.

The total capital shortfall for Banca Monte dei Paschi di Siena SpA (BIT:BMPS) and Banca Carige SpA (BIT:CRG) amounted to 2.9 billion euros ($3.7 billion), which is almost one third of the the total estimate of capital shortfall in the Eurosystem which totaled 9 billon euros, according to the stress test results published yesterday by the European Central Bank (ECB).

Spanish media reports circulating on Monday greatly underrepresented the capital shortfall and the number of EU banking institutions failing the ECB's Comprehensive Assessment of the European banking system (also called stress test). A total on nine Italian banks have failed the stress test.

Shares of Banca Monte dei Paschi di Siena SpA (BIT:BMPS) traded 21.5% lower in Monday trading despite the extraordinary measures announced by CONSOB. The shortfall at the bank amounted to 2.1 billion euros ($2.7 billion).

The results from the ECB’s Comprehensive Assessment of the European banking system have surprised investors holding shares of Italian banks, as even the properly capitalized UniCredit SpA (BIT:UCG) lost 2.5% and Banca Popolare di Milano SpA (BIT:PMI) 4.4%, while the broad Italian FTSE MIB Index (INDEXBIT:FTSEMIB) dropped by 2.4% in Monday trading.

The most pessimistic assumptions by market participants expected a shortfall of capital at Banca Monte dei Paschi di Siena SpA (BIT:BMPS) to come out close to zero, while the lowest expectations for Banca Carige SpA (BIT:CRG) were for a shortfall totaling 400 million euros ($508 million). Shares of the latter have dropped 17.2%.

Throughout the month of October shares of both Italian banks have experienced substantial Volatility Volatility In finance, volatility refers to the amount of change in the rate of a financial instrument, such as commodities, currencies, or stocks, over a given time period. Essentially, volatility describes the nature of an instrument’s fluctuation; a highly volatile security equates to large fluctuations in price, and a low volatile security equates to timid fluctuations in price. Volatility is an important statistical indicator used by financial traders to assist them in developing trading systems. Trad In finance, volatility refers to the amount of change in the rate of a financial instrument, such as commodities, currencies, or stocks, over a given time period. Essentially, volatility describes the nature of an instrument’s fluctuation; a highly volatile security equates to large fluctuations in price, and a low volatile security equates to timid fluctuations in price. Volatility is an important statistical indicator used by financial traders to assist them in developing trading systems. Trad Read this Term, while net short positions increased. The move by CONSOB was triggered after shares of Banca Monte dei Paschi di Siena SpA (BIT:BMPS) & Banca Carige SpA (BIT:CRG) opened in Monday trading sharply lower by 17% and 15% respectively.

Banks which have failed the stress test have 15 days to inform the ECB about their capital raising intentions. According to CONSOB, “It is of the utmost importance to ensure market confidence during this 15 days period, in order to minimize the risk of a loss of market confidence on these shares and reduce the risk of contagion effect to other shares of the Italian banking sector.”

After the publication of the European Securities and Markets Authority's (ESMA ESMA European Securities and Markets Authority (ESMA) is an independent Authority of the European Union that is responsible for the safety, security, and stability of the European Unions’ financial system and is charged with protecting the public. The European supervisory authority for the securities sector, ESMA was established on 1 January 2011. The European Securities and Markets Authority is an independent EU authority based in Paris. It aims to contribute to the effectiveness and stability of t European Securities and Markets Authority (ESMA) is an independent Authority of the European Union that is responsible for the safety, security, and stability of the European Unions’ financial system and is charged with protecting the public. The European supervisory authority for the securities sector, ESMA was established on 1 January 2011. The European Securities and Markets Authority is an independent EU authority based in Paris. It aims to contribute to the effectiveness and stability of t Read this Term) opinion on the matter which cleared the short selling ban, the measure will be effective starting today, the 27th of October, 2014, until the close of trading on the 10th of November, 2014, which is the final day of the 15 days term required to inform relevant authorities about recapitalization efforts.

According to this decision, traders will not be able to take short positions in the above mentioned shares. However, depending on the circumstances, the short selling ban could spread to the whole Italian banking sector should volatility remain high. Contracts on the FTSE MIB should not be affected for now.

The single European currency benefited from risk-off flows in today's trading as speculation about capital repatriation back into the EU, while stock markets shed value across the continent and underpinned demand for the EUR/USD, which is currently trading 0.3% higher just above the 1.27 figure.