The Securities and Exchange Commission (SEC), the US financial regulator, has issued an emergency order to improve investor protections against ‘naked’ short selling.
Naked short selling is selling a stock short without initially borrowing the shares or ensuring that the shares can be borrowed. The order was primarily installed to protect investors in of Fannie Mae and Freddie Mac securities, and primary dealers at commercial and investment banks.
The order requires anyone wishing to short sell specified securities to arrange borrowing the securities beforehand and deliver them at settlement. In addition, the SEC will “undertake a rulemaking to address these issues across the entire market”.
The emergency order will last from 21 July to 29 July. The SEC has stated that it may extend the order for a maximum of 30 days, if it determines its continuation to be necessary in the public interest and for the protection of investors.
“The SEC’s mission to protect investors, maintain orderly markets, and promote capital formation is more important now than it has ever been,” said SEC chairman Christopher Cox, in a statement. “Today’s action aims to stop unlawful manipulation through ‘naked’ short selling that threatens the stability of financial institutions. We will continue our vigorous commitment to investors by working within the SEC and in close cooperation with our regulatory counterparts to promote the continued health and vibrancy of our markets.”