Alleged Credit Crunch Villain Regulated
Short selling
Short selling is generally understood as the sale of a financial
instrument not owned by the seller. The short selling technique is
used to obtain advantage from an anticipated fall in purchase price
of shares so that the seller makes money if the stock goes down in
price. The short selling technique is used to obtain advantage from
an anticipated fall in price. An investor borrows a financial
instrument (for instance share depositary receipts) at the time of
the short sale. If later on the seller can buy these financial
instruments against a lower price, the seller will make a profit.
If the price increases, the seller will sustain a
loss.
Consultation paper
On 9 July 2009 the Committee European Securities Regulators
(CESR) published a proposal (CESR Proposal for a Pan-European Short
Selling Disclosure Regime) in order to introduce the uniform short
selling regime within Europe. CESR decided to present this paper as
a consultation. The market regulator asks everybody who is
interested to submit his opinion on how short selling should be
regulated in Europe before 30 September 2009. This initiative is
welcomed by everyone, taking into account the often heard criticism
on the decision-making process within the European Union. The
starting point is that short selling will be allowed. The ratio of
the consultation paper is that short selling will be allowed within
Europe so that the diverse/adverse approaches towards short selling
within Europe will be avoided. CESR recognized the important role
of the short selling within the financial markets. Among others
contributes short selling to the efficient price discovery,
increases the market liquidity, facilitates hedging and risk
management. (Onder andere bevordert short selling het proces van
prijsbepaling, verhoogt het de liquiditeit van de markt, en speelt
het een belangrijke rol in het kader van hedging en risk management
) There are, however, downsides to short selling too. These will
have to be regulated. The dangers arising therefrom mostly concern
the transparency of the short selling positions. (Deze gevaren doen
zich vooral voor als het gaat om de markttransparantie van short
selling-posities.) Therefore, the aim of the consultation paper is
to increase transparency within Europe by means of a disclosure
system of the short selling positions (disclosure
system).
Transparency
According to the CESR, the transparency of the short selling
will help deter market abuse and reduce the risk of disorderly
markets because of short selling. Such a system will provide the
market regulators with early signs of build-up of large short
positions. This would enable the regulators to monitor and take
action more effectively. The enhanced transparency would be
achieved by the disclosure system. The system proposed by CESR
acknowledges two disclosure thresholds:
i) every market participant with a net short position which
amounts to up to 0.10% of the issued share capital of the company,
whose shares are being short sold, needs to disclose this
information to the regulator. This information needs to be
disclosed as soon as day which follows the day when the position
have taken place (t+1), (private disclosure); (zie NL versie, dit
is wat ik bedoel. Dit dient uiterlijk te gebeuren op de
daaropvolgende werkdag (t+1) nadat deze is ontstaan (private
disclosure);
ii) as soon as a market participant has a net short position
which amounts to more than 0.50% of the issued shared capital of
the company whose shares are being short sold, that market
participant needs to make this information public (public
disclosure).
The above-mentioned obligations do not apply to the market
makers. Market makers are entities which usually, as part of their
business, deal as principal in equities, options or
derivatives.
A directive or a regulation
According to CESR, a new legal basis for short selling within
Europe is necessary. Such a legal basis could be introduced by
means of a directive or a regulation. The main difference between
these two legislative instruments is that in the event of a
directive, the Members States would still have to implement the
provisions thereof into their national laws, whereas a regulation
would be directly binding within all Member States.
Your
opinion
Do you have an opinion regarding this proposal? Are you in favor
of a directive or a regulation? Do you have any ideas of your own
how to regulate short selling in Europe? Go to
http://www.cesr-eu.org/ or contact us.