This
summer Greece's financial authorities fined 20 hedge funds for
speculating against the Greek economy. Now, the main global lobby
group for hedge funds is trying to tweak the EU's rules so they can
have a free play in the future.
Corporate
Europe Observatory
Global hedge
funds attacked Greek banks in the early part of 2015. These were the
months when the Greek economy was particularly fragile and in danger
in the aftermath of the change of government in January of that year.
In the wake of years of continuing economic crisis and harsh
austerity, the new government was battling with its creditors to get
a new and better deal from the EU. In response to Greek intransigence
and hesitance to sign up to austerity programmes, the European
Central Bank issued regular threats that liquidity to Greek banks
could be cut off.
At this
point, 20 hedge funds – including JP Morgan Securities and Quantum
Partners – moved in to do what they always do: speculate to make
money. They sold Greek bank shares short, spreading doubt about the
resilience of Greece's banking sector. Out of fear of an economic
collapse, the Greek financial services authority (the Hellenic
Capital Market Commission, HCMC) stepped in to stop them, handing
out fines to all 20 from €10,000 to €460,000.
In response,
the financial lobby is now trying to avoid a repetition. The hedge
funds’ lobby group AIMA (Alternative Investment Management
Association) is now trying to blow a hole in the EU rules on “short
selling” so they can escape similar blocks and sanctions in the
future. This can be seen from documents obtained by Corporate Europe
Observatory from the EU financial regulation agency ESMA (European
Securities and Markets Authority).
Naked
short selling
The method
used by the hedge funds is called 'naked short selling' and it is
rather simple: when you do naked short selling, you borrow the shares
and sell them quickly. That enacts a drop in the price, which allows
you to buy the shares back at a lower price. You make a profit, but
drop the company whose shares you are speculating against in trouble.
This is what
the Greek authorities deemed the hedge funds had done to their banks.
These hedge funds had acted as if they owned shares in a number of
Greek banks, and sold them for a considerable sum.
But there
are rules about naked short selling at the EU level. These say that
naked short selling can be restricted if it puts financial stability
at risk, which applies in the case of the Greek authorities'
measures. It might sound as if such an emergency brake is available
at need, but the European rules are not robust, and were never
intended to put a stop to speculation as such. The regulation
entitles hedge funds to apply many different methods to get a green
light for short selling, and there are many loopholes that enable
hedge funds to conduct naked short selling. One of them is the many
ways in which you can claim you own or possess a share and are not
just outright pretending. This is where AIMA has decided to push the
European institutions and to try to blow a hole in the rules. Or as
put to CEO by a former lobbyist for the hedge fund industry, they
“are trying to get increase their options to speculate allowed
within the SSR.”
“A
cheap ticket to speculation”
In a letter
AIMA raises doubts about the Greek Government's measures by claiming
that in a way, the hedge funds did indeed own the shares: “According
to the Short Selling Regulation [SSR], restrictions on uncovered
short-sellling [ie naked short selling] apply to the sale of a share
or debt instrument 'which the seller does not own at the time of
entering into the agreement to sell' (SSR Article 2 (1)(b)). In the
cases described in this letter, the entities in question sold shares
they owned following participation in a rights issue and yet were
found by the HCMC to have breached the SSR”.
So, this is
AIMA’s argument: as the hedge funds participated in a “rights
issue”, they owned the shares. So, what is a rights issue? And does
AIMA's argument that “participation in a rights issue” amounts to
ownership have credibility?
A rights
issue is a guarantee from an issuer (could be a bank or another
company), that if new shares are issued, you will be able to buy
them. It is frequently used as a guarantee to shareholders that their
share in the company will not be watered down by issuing new shares
they cannot obtain. But possessing a rights issue does not make you
the owner of extra shares, and you cannot use it to buy more shares
unless shares are actually issued for sale. To claim that a rights
issue equals ownership is creative at best. Essentially AIMA is
looking for a loophole and using this as a way to make it easier for
hedge funds to engage in naked short selling. This would enable them
to avert the kind of bans imposed by the Greek financial authorities.
“The
hedge funds are trying to get a cheap ticket to speculation”, a
former lobbyist for the hedge fund industry told CEO.
Hedge
funds want EU loopholes harmonized
The EU's
Short Selling Regulation was adopted in 2012 after a lengthy and
heated debate. It provides ample space for short selling, as
ownership of a share is actually not a precondition: “alternative
provisions resulting in similar legal effect” suffices. But the
EU definition of what a “similar legal effect” is, has not
included rights issues so far. Or rather, the definition of the
coordinating EU agency, the European Securities Markets Authority has
not directly addressed the issue. AIMA is asking ESMA to do exactly
that, and argues that some member states do include “rights issues”
in their definition of ownership.
So far,
however, ESMA has approved the Greek measures. And the ESMA press
office explains to CEO that thus far, the agency has not addressed
the legal issues raised by AIMA. And for “rights issues” to
become the cheap ticket to speculation across Europe, harmonization
of the implementation of the rules across EU member states would be
required – a demand tabled by AIMA years ago. But should ESMA
decide in favour of the hedge funds – or if they are pressurized to
do so - it would be a first step towards another big loophole for
speculators.
If countries
like Greece, whose population are already suffering the profound
effects of a prolonged economic crisis, are to protect their
economies from predatory short selling from global hedge funds the
ESMA needs to firmly reject the financial lobbies' appeals, and
instead use the occasion to consider how rules can be strengthened so
hedge funds will not feel tempted to try another attack such as the
one on the Greek banks.
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