CESR Seeks Shorting Restrictions
Monday, March 08, 2010
In a report submitted as technical advice to European
institutions, the Committee of European Securities Regulators (CESR)
has recommended the introduction of a pan-European disclosure regime
for net short positions in shares.
While recognizing that legitimate short selling plays an important
role in financial markets by contributing to efficient price discovery
and market liquidity, and facilitating hedging activities, the CESR
argues that it can also "be used in an abusive fashion to drive down
the price of financial instruments to a distorted level" and have have
an adverse impact on financial stability.
"Following the recent financial turmoil, it was widely recognized
that for a short selling disclosure regime to be efficient and to
ensure transparency for market participants, a convergent pan-European
regulatory approach is necessary," the CESR stated on March 2.
The short selling disclosure regime proposed by the CESR is a two
tier-model for the disclosure of significant individual net short
positions in all shares that are admitted to trading on an European
Economic Area (EEA) regulated market or Multilateral Trading Facility,
when the primary market of those shares is located in the EEA. Under
the proposed regime, at the lower threshold of 0.2%, positions should
be disclosed to the relevant competent authority. In addition, steps of
0.1% would trigger further disclosure obligations. After the position
reaches the higher threshold of 0.5% and any additional steps of 0.1%
thereafter, the position should be disclosed to the competent authority
as well as to the market as a whole.
Anastassios Gabrielides, Chairman of the Capital Market Commission
of Greece and Chair of CESR-Pol, stated:
“The advice provided by CESR seeks to pave the way for the
introduction of a consistent regime across Europe to short selling,
which both recognizes its value and mitigates its risks. The proposed
regime is therefore tailored to cover as wide a range of markets,
instruments and market participants as practically possible in order to
ensure the integrity of European equity markets."
"The regime would help to identify and restrain potentially abusive
behaviour at an early stage and allow regulators to take timely
preventive measures. While private notifications to the regulators
would be used for daily market supervision activities, public
disclosure of short positions is considered to provide informational
benefits to the market.”
The CESR said that members that already have powers to
introduce a permanent disclosure regime will begin the process of
implementing this regime. Those CESR members
who do not have the necessary legal powers will aim towards
implementing this regime on a "best efforts basis," until an EU regime
is
adopted.
The proposals have, however, received a frosty response from the
alternative investment industry.
“The Alternative Investment Management Association, the global hedge
fund industry association, believes that short-selling is a wholly
legitimate market practice," Andrew Baker, CEO of the Alternative
Investment Management Association, stated in response to the
announcement.
“CESR’s proposed reporting regime is greatly preferable to the bans
that were imposed (and then lifted) on short selling. However we think
it could be improved in several respects," Baker added.
“CESR has set the threshold for
reporting requirements too low at 0.2% of the issued share capital of
the relevant stock for disclosures to regulators and 0.5% for
disclosures to the market. This increases the likelihood that the
information gathered will be overly burdensome on hedge fund managers
and could swamp regulators with unnecessary information," he argued.
“We would also note the recent report
from the international management consultancy Oliver Wyman commissioned
by the MFA (Managed Funds Association) that concluded that the UK rules
requiring public disclosure of short positions came at the expense of
wider spreads and poorer liquidity in those stocks affected,” Baker
concluded.
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