The UK Financial Services Authority (FSA)’s decision last week to lift its ban on short-selling UK financial stocks but extend its disclosure requirements strikes the right balance between regulatory control and preservation of a vital market function, according to Arturo Bris, professor of finance at the Institute for Management Development (IMD), a Swiss business school.
“I welcome the regulatory reform in the UK because it allows short sales but increases disclosure for better control,” Bris told theTRADEnews.com. “The FSA has reached what I consider to be the perfect compromise of partially disclosing short positions, and at the same time allowing the practice to continue.”
On January 5, the FSA said it would allow its ban on short-selling 34 UK financial stocks to expire on 16 January, as originally planned. But it extended the rules stipulating disclosure of significant short positions to 30 June. Under the extended rules, firms need to report short positions exceeding 0.25% of the relevant company’s issued share capital, and any subsequent 0.1 percentage point increase in a holding – for example, when a position reaches 0.35% and 0.45%.
Bris contended that the need to disclose short positions could deter the accumulation of short positions above the 0.25% mark, due to hedge fund concerns that profit-making strategies would be jeopardised once regulators become aware of them. “At the same time, hedge funds can at least make some money from short strategies,” he added.
The buy-side has voiced fears about further public disclosure of short-selling positions. On 6 January, three buy-side trade associations – The US’s Investment Company Institute, Australia’s Investment & Financial Services Association and the UK’s Investment Management Association – issued a joint statement asserting that public disclosure has the potential to increase selling pressure, facilitate front-running of a fund’s position and reduce the incentive for proprietary research.
Bris said the buy-side’s concerns are justified, and adds that there will be growing pressure on regulators to disclose more information on short positions. “Full disclosure would have a detrimental effect, because it will kill the market – if you disclose all the information you have, there is no reason to trade,” he said. But he added, “As long as the US Securities and Exchange Commission and the FSA establish fair disclosure, I think that limits market manipulation but also at least gives some profit opportunity to those who employ short strategies.”
Even partial or delayed public disclosure would be opposed by hedge funds, said Bris. “Some of the hedge funds’ strategies would certainly be affected,” he said. “They would only have a small window in which to make money, and their profits would suffer.”