The veto of the 'shorts' in Liberbank complicates the approval of the rent of shares for the funds

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The request for funds to rent shares to third parties is nine years between the pending tasks of the Ministry of Economy. Three ministers have passed – Pedro Solbes, Elena Salgado and Luis de Guindos – and continue in the drawer. And the veto of the National Securities Market Commission (CNMV) to the opening of new short positions in Liberbank, which has redirected the focus towards the bears, threatens to keep it parked.

The industry, hand in hand with Inverco, claims that the funds can rent their securities to third parties to obtain an extra profitability through the commissions charged to the borrowers. In fact, Inverco sent Economy a proposal of the regulation, that after receiving in 2008 the approval of the Council of State would not have to go through the Congress. But the bearish pressures on Banco Popular and Liberbank in the first half of the year once again put in danger the final approval that the sector expected by the end of last year or the beginning of 2017.

Popular, which was intervened and awarded one euro to Santander on June 7 after the flight of deposits directly related to its stock market crash, ‘died’ with an aggregate of short positions of 9.77% of the capital that weeks ago reached the 12.37%. With the exclusion of the bank’s stock market chaired by Emilio Saracho, Liberbank suffered a wave of sales that took away 40% of its value in a week, and that slowed the CNMV with the temporary prohibition of new short sales on the entity for a month since last June 12. In July, the regulator chaired by Sebastián Albella extended the veto two more months, with which in September he will have to decide whether to withdraw it – in this case there would be no notification – or if he will renew it again.

From the Government, Luis de Guindos applauded the decision on Liberbank to consider that his falls had been caused by “speculative movements”, while Ramón Aguirre, spokesman of the PP in the Commission of Investigation of the Crisis, questioned why he had not taken also with the Popular – he did it in Congress before Luis María Linde , governor of the Bank of Spain, who has no competence in this respect and eluded the question.

The cases of Liberbank and Banco Popular are punctual and should not affect the decision to regulate the rental of shares

The CNMV justified it in that this type of measures is only effective if the downward pressure is reduced -1.39% of the capital in Liberbank-. In addition, it is dangerous to blame short sales with the falls of an action. In fact, those responsible for half of the largest short positions in the Spanish stock market lose money this year. Among others, those of DIA, which supports bets that account for 19% of the capital – reached 24.86% -, but the value rises 19% in 2017.

“These cases are punctual and should not affect the decision to regulate the rental of shares”, they explain from Inverco to ‘Bolsamanía’. However, optimism has been reduced in the association. After the investiture of Mariano Rajoy on October 29, he assumed that it would be imminent. Almost ten months later, the application is still parked in the drawer.


Image result for disadvantageThe first time the industry collective investment institutions (IIC), through its employer Inverco, submitted a formal request, was in 2008. That is, in the prelude to the crisis that hit the Spanish economy and, by extension, to the equity market. The boom of short positions at a particularly sensitive time for the financial sector made it politically impossible to push this regulation. The bears are always the hated investors when there are widespread losses to be the winners. In addition, between 2011 and 2012 there were temporary bans on short sales in several countries of the European Union, including Spain.

Even so, the practice of lending securities to third parties is widespread among mutual funds, pension funds and ETFs in most developed markets. ” The last country to allow IICs to lend their values was Belgium, and it did so in 2007,” says the document sent by Inverco to the Ministry of Economy and Competitiveness last year, after the June 26 elections. The association once again put on the table its old claim, once the stock market crashes were behind and La Moncloa aimed to return to have a stable government or, at least, not provisional.

“From a comparative law perspective, Spanish UCITS are at a comparative disadvantage: Spain is the only country in which UCIs cannot carry out securities lending operations,” says Inverco. The association calculates that investors who do lend their assets in Spain increased their profitability by 10.14 basis points with the shares and, in the case of public debt, by 1.40 basis points. A few tenths more in the annual return that would depend on the intensity and recurrence of the loan.

The rent, in fact, is common among international investment vehicles that have shares in Spanish companies. For example, 16% of DIA is in the hands of four institutional investors – the Norwegian sovereign fund Norges Bank, the US investment banks Goldman Sachs and Morgan Stanley, and the US manager BlackRock – which lend practically half of these securities to third parties.

With this loan, the funds or ETF maintain their long-term exposure and scratch an extra short-term return. But they are also the main ammunition for the ‘hedge funds’ that bet against a company for bearish convictions or for establishing coverage for other bullish investments – long-short strategy -. Their traditional ‘modus operandi’ is to borrow securities to sell them upon receipt, and then buy them back in the market when they have to return them to their rightful owner. If in this process the instrument falls, they win (see a video with the operation of the short positions ).

“It is not only for the ‘shorts’, but there are also other investors who need to borrow securities for their operations,” they recall from Inverco. This is the case with market agents such as those who arbitrate failed transactions between investors. However, the clients of the rental of securities are usually the bearish ones. Precisely for this reason, every time there are accidents in the market – for example, the fall of the Popular or the veto in Liberbank – this type of investment is questioned, the reason why the industry fears another indefinite delay in the approval of the regulations.