ESMA investigation of BaFin neglects short selling ban
The controversial short selling ban of Wirecard shares in
2019 will not be reviewed as part of the European Securities and Markets
Authorities (ESMA) inquiry into the Germany market regulator’s actions in the
lead up the fintech firm’s collapse.
In February last year, Germany’s BaFin requested ESMA’s
endorsement of a two-month short selling ban on Wirecard shares. At the time,
and since, BaFin claimed such action was essential to protect the payments
processing giant from malicious hedge funds working in coordination with media
outlets to bring it down.
BaFin also claimed that to let Wirecard suffer further
losses than the 30 percent decline in share price it had already recorded
earlier in the month would risk destabilising the DAX 30, Germany’s premier
index, which the firm had joined in September 2018 by supplanting Commerzbank.
“At the time of our short selling ban, we observed a) big
(and growing) net short positionings, b) significant losses in share price, c)
high volatility and d) specific hints of the manipulation of share prices (via
coordinated short selling attacks),” A BaFin spokesperson told SLT in late
June.
A day after BaFin submitted its request ESMA issued a
positive opinion on the ban, thereby expanding its remit to include all EU
market participants. A negative opinion would have meant BaFin’s ban would only
apply in Germany.
An ESMA spokesperson told SLT on 24 June that the authority
made its decision based on the material provided by BaFin in support of their
proposed short selling restriction.
“ESMA’s role in assessing requests under the Short Selling
Regulation (SSR) is limited to assessing whether there is a risk to financial
stability or market confidence and on the basis of the information available at
that time provided by BaFin we concluded that this was the case,” the
spokesperson explained.
It was also noted by the spokesperson that the SSR only
allows ESMA a 24-hour window to respond and “does not require, or provide any
powers to ESMA to conduct supervisory investigations into the underlying
evidence supporting a short selling measure proposed by a national authority”.
It was the first ban on its kind to shield a single fintech
firm from short sellers outside of a market crisis scenario. Previous bans had
only been imposed on one or two individual struggling banks in southern
European states, and only for single trading days at a time, not months.
As such, the ban has been widely criticised for representing
a misuse of the SSR which is meant to help stabilise markets during extreme
volatility, not protect individual firms accused of wrongdoing.
Today, the German regulator is facing an inquiry instigated
by the European Commission and spearheaded by ESMA to assess the supervisory
response in the financial reporting area by BaFin in the events leading to the
collapse of Wirecard.
However, an ESMA spokesperson has confirmed to SLT that the
short selling ban and the potential misuse of the SSR will not come under
scrutiny in this instance.
Recital 32 under the SSR states that ESMA “should ensure
that measures are taken by competent authorities only where necessary and
proportionate”, while recital 34 limits such actions to “exceptional
circumstances”.
So far, bar some peculiarities in the timings of new reports
being published and short positions being executed, no evidence of foul play
has been presented by any party, despite repeated accusations being levelled at
certain hedge funds and media outlets by both Wirecard and BaFin.
In the wake of revelations that Wirecard senior management
may have cooked the books to the tune of nearly €2 billion, along with the
resignation and arrest of its then CEO Markus Braun, BaFin and ESMA declined
requests by this magazine to release the evidence of the short seller
conspiracy that underpinned the short selling ban.
Without such evidence, it is impossible to conclude whether
the events in February 2018 could be defined as “extraordinary” or were in fact
the unfortunately too familiar scenario of a fraudulent firm facing the
negative consequences of being unmasked.
What will ESMA’s inquiry look into?
Instead of the ban, ESMA will focus on the application of
the Guidelines on the Enforcement of Financial Information (GLEFI) by BaFin and
the Financial Reporting Enforcement Panel, the designated competent authorities
for the supervision and enforcement of financial information in the Federal
Republic of Germany under the Transparency Directive (TD).
The fast-track assessment will be conducted using GLEFI and
ESMA’s Peer Review Methodology. It is expected to be completed by 30 October.
The peer review tool has been chosen as the TD only contains
high-level principles regarding financial reporting and its supervision, and
the IAS Regulation is not included in the list of acts for which ESMA may
launch a Breach of Union Law investigation.
In a statement on the fact-finding mission, ESMA says:
“High-quality financial reporting is core to investor trust in capital markets
and Wirecard’s collapse has undermined this trust.
“Therefore, it is necessary to assess these events to help
in restoring investor confidence.”
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