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9 maltatoday | WEDNESDAY • 15 JULY 2020 NEWS COMMERCIAL WHEN the wind of crisis beats hard on the windows of financial markets, with double-digit daily losses marking equity markets all over the world, there are very few things a securities market supervisor can do to stop indices from falling. No magic potions to give, no silver bul- lets to shoot. But there is at least one thing it must not do: shut down the market. Closing stock markets in a time of crisis is an issue that goes a long way back. Hand- books of finance recall very few precedents in history, mostly due to logistic factors (London, 1987 (1 day), NYSE/NASDAQ, 2001 (4 days), NYSE/NASDAQ, 2012 (2 days), Athens, 2015 (5 weeks), and scholars' findings on the point outline several po- tential drawbacks of such a measure (spill- over effect from equity to sovereign bonds markets, freezing of liquidity for both re- tail/SMEs and institutional investors, the market overreaction when re-opening). Nevertheless, the cries of those demanding a shutdown have always been loud. Dur- ing the COVID-19 pandemic, these voic- es came even stronger from both political and institutional rooms. At CONSOB (the Italian Securities and Exchange Commis- sion), we carefully listened to that request, we deeply analysed the situation and, final- ly, we firmly refrained from taking such a drastic decision. As the European Securities and Markets Authority (ESMA) clearly stated, main- taining open and orderly markets "allow(s) the process of adjusting prices to new in- formation to continue, and they provide li- quidity to the benefit of investors by allow- ing them to rebalance portfolios and meet contractual obligations". The Internation- al Organisation of Securities Commissions (IOSCO) was of the same opinion. The COVID-19 crisis, furthermore, is showing another reason to advocate for the non-closing case. Figures of the cur- rent crisis are definitely abnormal in both the downside and the upside trend. In March the equity market dramatically collapsed at a pace never seen in former crises: S&P500 took only 19 days to reach a 30% loss compared to 31 days in the Great Financial crisis and 152 days in the dotcom crisis. Volatility too reached all-time highs, when the VIX index recorded a shocking peak of 82.7 (80.8 during the Great Finan- cial crisis). But what happened from mid- March on is of no less remarkable signifi- cance. All main equity indices pulled off terrific rebounds in a range of 25%-40%, pairing most of the previous loss in less than two months. In the aftermath of the Great Fi- nancial crisis, the best performer (S&P500) took more than one year to reach the same result. To cut a long story short, an un- precedented market shock followed by an unprecedented market reaction. In be- tween, unprecedented monetary and fiscal stimulus packages. According to McKinsey analysis, Gov- ernments' economic responses alone are worth more than USD 10 trillion, which is three times more than the response to the 2008–09 financial crisis. Moving back to the markets open/mar- kets closed debate, we can easily say that such a historical – and coordinated - re- sponse would not have been implemented if governments and central banks had not had the measure of the unparalleled se- verity of the crisis. People against markets shut-downs are used to saying that forcing a stock market to close would be like "get- ting rid of the thermometer when it signals a fever". Expanding on this metaphor, we could say that when your illness is so severe that you need to take antibiotics, you must have a thermometer marking very high values to convince the doctor to prescribe them. Strongly supporting the thesis of keep- ing capital markets open even during the strongest crisis does not mean doing noth- ing to prevent markets from free-falling. In order to preserve the orderly functioning of markets, reinforce market confidence and stop potential bearish speculation, CONSOB took a resolution to impose a ban on the creation of net short positions and on the increase of existing net short positions on 17 March. Simplistically viewed as a mere short-sell- ing ban, this measure has been criticised by those who, among market operators and scholars, are strictly convinced that a short-selling ban has proven so far useless if not even detrimental for liquidity and price discovery. CONSOB resolution presents, however, innovative elements deserving attention. Firstly, it overcame the classic naked/cov- ered sales dichotomy to embrace a quite larger scope of operations, including the use of (short) derivatives and other bear- ish strategies and the reference to (the creation of or the increase in) net short position. secondly, it was not properly a CONSOB measure, having been adopt- ed simultaneously by six other National Competent Authorities (NCAs) under the coordination of ESMA. From this perspective, it can be seen as one of the most significant forms of su- pervisory convergence ever deployed in Europe and a benchmark for future coop- eration. Finally, acting as a/the first actual stress test for the EU short-selling Regula- tion, it denounced its limits paving the way for a potential overhaul of the rules. It is obviously too early to collect evidence of how successful this action – simultaneous- ly terminated by all authorities on 18 May – was. We do know, however, that this experi- ence will make it easier to quickly adopt measures again in the case of a second wave. The winds of crisis seem to have faded momentarily, and we all do hope that we will be facing a quiet autumn. Meanwhile, we can meditate on the two lessons we have learned in these tumultuous weeks. Firstly, we saw that extremely hard times deserve extremely effective actions. These necessarily have the nature of fiscal and monetary responses, but such measures, in turn, need a liquid, transparent and con- tinuously working capital market in order to fully unlock their potential. Secondly, European markets terrifically enjoyed the spirit of greater coordination deployed by EU institutions; hopes of a quick recovery of European economies rely on the revolutionary project of so far unknown cooperation among the Member States. Securities market supervision must take the same route. It's time for an unprecedented shift to- wards a new dimension of regulatory and supervisory convergence suitable to em- power the union of real crisis management tools and resources. This article was first published in the June Special Edition of the MFSA's e-publi- cation NewsHub. Visit www.mfsa.mt to subscribe. Capital markets should remain open in time of crisis Carmine Di Noia, Commissione Nazionale per le Società e la Borsa (CONSOB)