More short selling controls imposed as turmoil spreads

Following last week’s bans on short selling imposed by several regulators, including those in the US, UK, Switzerland, Belgium, Ireland and Canada, several other countries have now followed suit.
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Following last week’s bans on short selling imposed by several regulators, including those in the US, UK, Switzerland, Belgium, Ireland and Canada, several other countries have now followed suit.

Countries in the Asia-Pacific region in particular have been active in imposing restrictions and bans on the trading practice this week. Following its ban on naked short selling, announced last Friday, the Australian Securities & Investments Commission (ASIC) moved on Sunday to also ban more traditional short selling – which it calls ‘covered short selling’ – despite having permitted the continuation of this activity in previous announcements. The ban took effect from the market open on Monday.

Although some countries, such as the UK, only banned short selling in financial stocks, Australia’s short-selling prohibition covers all stocks. ASIC will, however, will look at lifting the ban for non-financial stocks after 30 days.

Also on Sunday, Taiwan’s Financial Supervisory Commission reportedly banned short selling in the component stocks of the Taiwan 50, the mid-cap Taiwan 100 and the Taiwan Technology Index if they are trading below the previous session’s closing price.

And on Wednesday, South Korea’s Financial Services Commission decided to strengthen supervision on short selling and strengthen disclosure rules

after regulators discovered a number of regulatory violations, according to news reports.

More European regulators also imposed bans. On Sunday, The Netherlands’ Authority for the Financial Markets banned naked short selling in financial stocks. And on Monday,

Italy’s Consob and Portugal’s CMVM did likewise. This follows last week’s bans on short selling issued by Luxembourg and Belgium.

Others, however, are still monitoring the situation before deciding whether or not to impose bans. On Friday, the Hong Kong Securities and Futures Commission (SFC) said it would continue to monitor Hong Kong’s short selling regime. The rules were strengthened in 1998 after the Asian financial crisis, and short-selling is only permitted in certain securities prescribed by the Stock Exchange of Hong Kong.

“The current system in Hong Kong is robust and has proven itself to work well over the last 10 years,” said Martin Wheatley, the SFC’s CEO, in a statement. “If, however, we consider Hong Kong has become a target for abusive short selling strategies, we will act quickly and firmly, to protect the integrity of the market.”

Although regulators are imposing the bans to try and improve stability in the trading of financial stocks, their actions have already prompted a backlash.

On Thursday, the US Security Traders Association (STA) issued a statement defending short selling and urging regulators not to extend the existing US ban, due to end on 2 October.

“Given the current crisis in the financial markets and the SEC’s actions relative to short sales, the association notes that short selling has, improperly, become a lightning rod for all that is wrong with the market,” the statement read. “The STA is concerned regarding the unprecedented new restrictions on short sales.

What began as an attempt to dampen volatility by restricting short selling in 19 financial services sector stocks has now expanded into a global program encompassing multiple sectors.”

And on Friday, the International Securities Lending Association (ISLA), Risk Management Association (RMA), Securities Industry and Financial Markets Association (SIFMA), Pan-Asian Securities Lending Association (PASLA) and Australian Securities Lending Association (ASLA) issued a joint statement urging regulators not impose measures that might prevent or discourage the lending of financial shares.

“Dealers must be allowed to take short positions in the course of providing liquidity for their customers,” the statement read. “They need therefore to continue borrowing financial shares from lenders, such as pension and investment funds and insurance companies, for this purpose.” It added, “Continued lending is also important in order to prevent chains of failed settlements.”