No “Silly Season” for Securities Lending

The time known as the “Silly Season” is upon us. An annual tradition, the Silly Season marks that time in the year where nothing of note is happening. As a result, our newspapers usually contain bizarre stories that would never normally get any airtime and people realize that as our politicians are all on holiday, no one is actually running the country. This year is different of course; with the Queen’s Jubilee and the Olympics in London, there is no shortage of activity.

Similarly, securities lending has much going on. For example, the European Securities and Markets Authority (ESMA) has launched new guidelines on income distribution for securities lending. Of arguably more immediate importance, new short selling bans have also been re-introduced in Italy and Spain. Spain has put a three-month ban on all shares in place from July 23, and Italy mandated a new ban for one week only starting July 29 for insurance and banking shares.

In what some have described as an act of desperation, the short selling bans have been introduced as a result of market volatility even though such bans have been shown in the past to be ineffective and indeed even counter-productive to this aim. Such bans have impaired liquidity and damaged already ailing investor confidence; they have also been seen to drive short selling into other European markets.

While securities lending is not equal to short selling, it is a good proxy for measuring such activity, especially as we are now outside of the main dividend season. While it is a little early to see an impact from these bans on lending activity in these locales, prior evidence shows that such bans raise spreads, drive out liquidity and scare investors – presumably exactly what the regulators do not intend. For Spain and Italy, does this herald the start of their own Silly Season, perhaps?

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