Wednesday18 March 2020 ★ FINANCIAL TIMES 21
MARKETS & INVESTING
P H I L I P STA F F O R D— LONDON
DAV I D K E O H A N E— PARISFour European countries have applied
temporary bans on betting against the
prices of a range of sharesto try to calm
markets shaken by coronavirus.
France, Italy, Spain and Belgium said
overnight they would move to stop the
short selling of hundreds of stocks listed
on their markets. European markets
staged a briefrebound in early morning
trade in Europe, before giving up the
gains by lunch time.
The practice of short selling involves
investors borrowing shares and then
selling them, hoping to buy them back
later at a lower price before returning
them and pocketing the difference. The
practice has been blamed for exacerbat-
ing volatility during times of stress.
The Autorité des Marchés Financiers,
the French regulator, said its ban would
cover 92 stocks and would last a day. It
applies to many of France’s blue-chip
stocks such as Air France-KLM, BNP
Paribas and Renault, but also many
small and mid-cap stocks. Finance min-
ister Bruno Le Maire praised the deci-
sionyesterday, and said the ban could
be extended, as markets staged a mod-
est recovery.
By mid-afternoon the CAC 40 index
was down about 0.3 per cent, having
shed more than 5 per cent on Monday.
“It’s a good decision and it’s a neces-
sary decision,” said Mr Le Maire. “We
are ready to go further, we are ready to
go up to a month, and it’s a decision
taken at the European level. We want to
avoid speculation on the markets.”
The minister added: “The French
banks are hit on the market but they are
very solid. [They] have the necessary
capitalisation to be solid.” Shares in
lenders BNP Paribas and Société Géné-
rale have halved so far this year.
In a statement late on Monday, Spain’s
regulator said its ban for all Spanish
stocks would last for a month, and the
prohibition might be extended if
needed.
It cited the extreme volatility in Euro-
pean markets, and the state of emer-
gency that was declared by the Spanish
government over the weekend. The ban
will extend to derivatives that involve
creating a short position.
Consob, the Italian regulator,
restricted short selling on 20 of Italy’s
biggest companies forthe day yester-
day. Its list consists of mainly banks and
insurance companies such as UniCredit
and Mediobanca, but also includes Fiat
Chrysler and Telecom Italia. The ban on
17 Belgian stocks will also last for one
day.
European rules allow national regula-
tors to apply a temporary EU-wide ban
if there are falls of more than 10 per cent
for the most actively traded shares, or
20 per cent or more for less liquid
shares.
Equities
France, Spain, Italy and Belgium ban
short selling in effort to restore calm
R O B E RT S M I T H A N D CY N T H I A O ’ M U R C H U
LONDONMorningstar has placed one ofH2O
Asset Management’s flagship funds
under review, a decision theinvest-
ment rating agency said stemmed from
management’s “repeated failures to
manage risk effectively”.
London-based H2O, a subsidiary of
French bankNatixis, has emerged as
one of thehighest-profile victimsof the
recent market rout, with several of its
bond funds recording lossesof more
than 50 per centin a matter of weeks.
Yesterday Morningstar said it was
placing one of these funds — H2O Alle-
gro — on review for a downgrade after
“extreme losses”, citing its 18 per cent
and 25 per cent daily falls last Monday
and Thursday respectively. Allegro,
which focuses on bonds and currencies,
imposednew feesfor investors last
month as its assets hit €1.6bn, a level
that the firm said was “approaching its
management capacity limit”.
Matias Mottolaat Morningstar said
the recent losses “raise further concerns
over the effectiveness of the fund’s risk
management process”, and described
the “derailment” from its volatility tar-
gets as “alarming”.
A spokesperson said H2O “has a
robust risk management framework in
place and the firm has reduced signifi-
cantly its exposures across its portfo-
lios”, and added: “Risks must be
assessed with regards to the investment
horizon of each fund which, in the case
of H2O Allegro, is three years.”
Last June, Morningstarsuspended its
ratingon Allegro after the Financial
Times detailedH2O’silliquid bond
holdings linked to financier Lars Wind-
horst, who iswell-knownin his native
Germany for his legal troubles.
When Morningstar resumed the rat-
ing, itdowngradedthe Allegro fund to
“neutral” — its second-lowest rating,
ahead of “negative” — citing H2O’s
“loose risk controls”. The fund rating
agency also directly questioned the
“robustness” of valuations of the Wind-
horst-linked bonds.
H2O’s chief executiveBruno Crastes
last year described the resumption of
the rating as a “significant vote of confi-
dence”.
At the height of the fallout arising
from H2O’s illiquid debt exposures last
summer, when investorspulled about
€8bnfrom its funds, Mr Crastes vowed
to“never” halt redemptions, which
allow investors to withdrawmoney on a
daily basis. H2O managed about €30bn
of assets at the start of2020.
Mr Crastes’ comments prompted Paul
Myners, the former City minister, to
submit a writtenquestion to UK parlia-
mentasking the government and the
financial regulator if they approved of
this statement. Last week Lord Myners
returned to that theme,askingwhat
plans the government had to investigate
H2O’s “risk control strategies and exec-
utive leadership” in light of thelosses.
H2O’s troubles have fed through to its
parent, Natixis, which in Novem-
berunveiled measuresaimed at rein-
forcing its risk management.
Natixis declined to comment on
Morningstar’s action.
Asset management
Morningstar flags ‘repeated failures’ at
H2O and puts fund rating under review
H2O ‘has a robust risk
management framework
in place and the firm has
reduced... its exposures’
France’s short-selling ban included
blue-chip stocks such as BNP Paribas
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P H I L I P STA F F O R D— LONDON
As worries over coronavirus sweep
through markets, generating sharpvol-
atility, some regulators are beginning to
push for trading to becurtailed.
They fear thatswings in prices have
become disorderly and institutions with
depleted workforces cannot cope with
heavy volumes.
“We absolutely believe in keeping the
markets open,” Steven Mnuchin, US
Treasury secretary said yesterday. “We
may get to a point where we shorten the
hours if that’s something they need to
do.”
Australian regulators on Monday told
the most active traders on the country’s
equitymarketsthat they would have to
trade significantly less, as higher vol-
umes would put brokers and the
exchange itself under strain.
The Philippine Stock Exchange,
meanwhile,was to be closed from yes-
terday afterRodrigo Duterte, the Philip-
pine president, placed the country’s
largest island of Luzon into an
“enhanced community quarantine”.
The moves raise the question of
whether trading should be more
broadly shutin response to the corona-
virus crisis.
Jay Clayton, chair of the US Securities
and Exchange Commission, told CNBC
on Mondaythat he was not in favour.
“Markets should continue to function
in times like this,” he said. The Financial
Conduct Authority, the UK financial
regulator, appears to agree.
“Our aim is to continue to maintain
open and orderly markets notwith-
standing current volatility,” it said.
Are there precedents for shutting
exchanges?Yes, but shutdowns are rare and have
tended to be brief, connected mostly to
particular problems in the vicinity of
exchanges.
The London Stock Exchange last
closed for trading in 1987 when storms
prevented thousands of traders from
getting into the city. The New York
Stock Exchange and Nasdaq closed in
October 2012 to prepare for Superstorm
Sandy, andshut for several days after
9/11, when communication cables and
offices were damaged.
Such examples illustrate that a
critical mass of people was once needed
to be in a particularsite, at one time, for
markets to function. These days, the
nature of trading has changed, and
humans have been cut out of the process
to a large extent.
Most deals on equity, futures and cur-
rency markets are executed automati-
cally by computers on servers in data
centres.
Still, traders say the shift to operating
remotely such as at disaster recovery
sites andat homeis exacerbating pock-
ets of poor liquidity.
Not all shutdowns have been caused
by logistical problems. In Greece in
2015, the Athens stock exchange was
closed for five weeks following the
imposition of capital controls, along
with bond and derivatives markets and
clearing and settlement houses.
How have bourses stayed open
until now?
Many have been activating their busi-
ness continuity plans. Companies such
as the London Stock Exchange, Nasdaq
and Intercontinental Exchange have
split their staff into those working
remotely, from home, or on call for cer-
tain critical operations such as surveil-
lance and technology. Ancillary serv-
ices,have beentruncated or cancelled.
CME, CBOE Global Markets and Nas-
daq have closed theiropen outcrypits
foroptions,though they continue to
operate these markets electronically. So
far most exchanges’ operations have
held upand reported few problems.
Changes have been brought in to ease
the stress.The London Stock Exchange
has eased the bands by which market
makers, normally banks or high-fre-
quency traders, are able to quote prices
to buy and sell some securities.
That will allow them to offer more
attractive prices toparticipants, and
persuade them not leave the market
when it seems too risky. The European
Securities and Markets Authority has
tightened rules around disclosures for
short selling securities.
What is the benefit of closing?
In practical terms, it would lessen the
strain on exchanges and the brokers
who use them, potentially reducing the
scope for market accidents on top ofan
economic and public health crisis.
This is what regulators in Australia
have sought to pre-empt. As Guy
Warren, chief executive of ITRS, a UK
trading technology provider explained:
“Without the right capacity planning
tools, it is extremely difficult to identify
what the pinch point is for an IT system
and when it is going to happen.”
What is the downside?
Stocks, bonds, exchange traded funds
and futures are traded across borders, in
markets that are highly interlinked.
Trading in FTSE 100 stocks, for exam-
ple,clusters on theLSE, but futures on
components of that index are more active
on ICE Futures Europe. UK-listed compa-
nies are also part of the Euro Stoxx 600
index, which is traded in Germany.
Morning trading in Europe, mean-
while, isinfluenced by the price ofeMini
futures contracts, which are traded in
Chicago.Unless all thosevenues are
shutsimultaneously, traders will go to
sites that are open and liquid. Oneoffi-
cial said the result would be “a mess”.
Shutting markets couldmake matters
worse once they reopen. WhenAthens
reopened after its hiatus five years ago,
itfell one-fifth. Shutting markets could
prevent investors from getting out of
sliding shares while their assets retain
some value. Some funds, of course, also
profit when asset prices fall.
Stacey Cunningham, president of the
New York Stock Exchange, on Monday
said that it was “important” for markets
to remain openand that closing them
would only compoundanxieties.
“[It would] not change the underlying
causes of the market decline, would
remove transparency into investor sen-
timent, and reduce investors’ access to
their money,” shetweeted.
SEC chief favours continued
functioning but global staffing
is being hit by coronavirus
‘It is
extremely
difficult to
identify
what the
pinch point
is for an IT
system’
Regulators fear
price swings
have become
disorderly and
institutions with
depleted
workforces
cannot cope
with heavy
volumes
Toby Melville/ReutersEquities.Volatility
Watchdogs weigh up costs and
benefits of exchange shutdowns
E VA SZ A L AY— LONDON
C O L BY S M I T H— NEW YORKCompanies and banks are hoarding
dollars to paydebts and keep business
flowing during thecoronaviruspan-
demic, helping to send the currency
higher.
A collapse in revenues, seized-up debt
markets andfears over the economic
impact of Covid-19 have all encouraged
companies to max out their credit lines
to keep large amounts of cash at hand.
The US Federal Reserve has stepped
in, seeking to enhance flows around the
world’s financial system by lowering the
cost of borrowing dollars through swap
lines. Such facilities, set up with the cen-
tral banks of Japan, Europe, the UK,
Canada and Switzerland, allow cheap
access to dollars.
But the pressure is not abating, say
analysts. The dollar has pushed higher
against its peers this month, despite two
US central bank emergency cutsthat
have brought interest rates down to
zero. Ordinarily, rate reductions of this
magnitude would weaken a currency.
“When you have the most unexpected
recession we’ve seen in modern times, a
lot of people are caught in dollar-fund-
ing issues,” said Paul Meggyesi, head of
FX strategy at JPMorgan in London.
“This crisis is affecting every sector and
every country in a synchronised way.”
Yesterday one key measure of dollar
demand doubled, as the so-called
cross-currency basis between the euro
and dollar moved from -60 basis points
to roughly -120bp at one point. On the
day the dollar gained at least 1 per cent
against each of the other G10 currencies.
George Saravelos, the global head of
FX research at Deutsche Bank, said
banks are also hoarding dollars, as they
worry about companies defaulting on
debts they have or asking to borrow
more. Thishas meant that the cost of
dollar funding keepsrising, despite the
sweeping measures taken by the Fed.
“We underestimated how acute dollar
funding pressures would become”,
added Mr Saravelos. “We worry that fix-
ing this dollar shortage may be more dif-
ficult than policymakers think.”
When fears over coronavirus started
tohit markets, the dollar did not climb.
Despite itsreputation as a haven in
times of stress andas the world’s pre-
eminentreserve currency, it defied
expectations by ticking lower at the end
of February and beginning of March.
But theevents last week — with a
crash in the oil price, some of the biggest
declines in stocks for decades, and
alarming strains in theUS government
bond market — finally sent the dollar on
its biggest rally in almost five years.
In the week of March 9, the pound lost
nearly 6.5 per cent against the dollar
while the Mexican peso and the Russian
roubleslumped 5 per cent.
See Lex
Currencies
Bank hoarding
and fears over
Covid-19 push
dollar higher
‘We worry that fixing
this dollar shortage may
be more difficult than
policymakers think’
MARCH 18 2020 Section:Markets Time: 17/3/2020-17:48 User:andy.puttnam Page Name:MARKETS1, Part,Page,Edition:EUR, 21 , 1