Regulators extend short-selling restrictions

The US Securities and Exchange Commission (SEC) has implemented new measures designed to protect investors against abusive short-selling, including a enhanced disclosure regime for the reporting of short-sales.
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The US Securities and Exchange Commission (SEC) has implemented new measures designed to protect investors against abusive short-selling, including a enhanced disclosure regime for the reporting of short-sales. Meanwhile, fellow securities regulators in France and Japan have extended their temporary short-selling restrictions.

The SEC has made permanent a temporary rule, 204T, which requires broker-dealers to promptly purchase or borrow securities related to a short sale, thus limiting the potential for naked short-selling, where a firm short-sells a stock it has not borrowed. The temporary rule, approved by the SEC at the end of 2008, was due to expire on 31 July.

Rule 204 requires investors or their brokers to locate or deliver shares to close a ‘fail to deliver’– which occurs if a firm does not locate deliver shares by three days after the trade date, thus resulting in a naked short-sale – by no later than the beginning of trading on the day after the fail first occurs.

Furthermore, the SEC has committed to working with several self-regulatory organisations (SROs) to make short-sale volume and transaction data available through SRO websites. The regulator expects this to result in a substantial increase over the amount of information presently required by another temporary rule, 10a-3T, due to expire on 1 August, which only applies to certain institutional money managers and does not require public disclosure. SROs include exchanges and the Financial Industry Regulatory Authority (FINRA).

The new disclosure regime will include information such as the daily publication of short-sale volume information, disclosure of short-sale transaction information on a one-month delayed basis and the twice-monthly disclosure of fails data, which details the number of fails to deliver.

The US regulator also plans to hold a public roundtable on 30 September to discuss securities lending, pre-borrowing, and possible additional short sale disclosures. Those on the roundtable will consider issues such as whether a short-sale indicator should be added to the US consolidated data feed and whether there is a need for public disclosure of individual large positions.

The SEC will continue to consider proposals for a short-sale price test and circuit-breaker restrictions, which would see stocks either suspended or unable to trade lower than the previous price in the event of a severe drop in value.

“Today’s actions demonstrate the Commission’s determination to address short-selling abuses while at the same time increasing public disclosure of short selling activities that affect our markets,” said SEC chairman Mary Schapiro in a statement.

Separately, French financial regulator Autorité des Marchés Financiers (AMF) has extended its ban of the shorting of a select group on financial stocks until January 2010.

AMF has also urged the Committee of European Securities Regulators, the body charged with ensuring consistent regulation across European member states, and International Organization of Securities Commissions, a global securities regulators’ association, to consider further short-selling measures. These include whether investors should inform their brokers whether the order they are placing is for a short sale, whether intermediaries should pass this information on to regulators, whether short-sellers should be prevented from executing a trade at a lower price than the previous traded price, and whether the regulator should be permitted to ban short-selling in exceptional circumstances.

In addition the Japanese Financial Services agency has extended two temporary short-selling restrictions, which were due to expire on 31 July, until 31 October 2009. The two restrictions are the prohibition of naked short-selling and the disclosure of short positions of over 0.25% of outstanding issued shares in a name. This is the second time the temporary restrictions have been extended – they were originally due to expire at the end of March.