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.