Korean FSC lifts short-selling ban on non-financial stocks

The Korean securities market regulator Financial Services Commission is lifting a three-year ban on short-selling of non-financial stocks, as reported by the Asian Investor today. As the domestic market has been up 9% for the past three months, the FSC thinks this would be an opportune time to end universal short-selling ban. The short-selling ban on financial stocks however has not been lifted. The hedge fund industry has not expressed much opposition yet and seems to agree with the decision insofar. As observed by Asian Investor, a consensus lingers among Korean industry professionals that the short-selling ban on financial stocks should not be lifted yet as the Eurozone woes persists.

It is no wonder why the continuation of such ban makes sense. Korean financial stocks have been reacting quite sensitively to Eurozone developments. The Korea Herald summarized yesterday the performances of domestic financial stocks (Woori down 5.31%, Shinhan down 6.23%, KB Financial down 6.45%), as Italian sovereign bonds yields shot above 7%. In light of such developments, the lifting of  the short-selling ban on financial stocks is generally viewed in Korea as untimely. The ban will continue to be effective for 110 financial stocks listed on KOSPI.

At the same time, there are concerns that the lifting of short selling ban on domestic non-financial stocks will add to the volatility of related futures and options contracts for months to come. And some professionals suggest that the universal short-selling bans should continue until uncertainties about the Eurozone and indeed the global outlook see signs of clearing (a day which unfortunately may not arrive anytime too soon). The easing of such short selling ban may be intended to coincide with the new hedge fund “welcoming policy” just put in force in September this year. By way of such “welcoming policy”, the FSC aspires to nurture home-grown hedge funds; the agency now allows individual investment in such funds (a relatively low threshold of USD459,000) and also had eased their borrowing limits (400 from current 300 percent). 

The Asian Investor’s report on the lifting of short-selling ban can be accessed here.

Korea Herald’s summary of financial stock performance (Nov 10) can be accessed here.

Reuter’s report on the hedge fund “welcoming-policy” can be accessed here. 

SEC Consults on short selling regimes

On 4 May the US SEC published on its website a request for public comment on the feasibility, benefits, and costs of two short selling disclosure regimes as a part of a study mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Comments are to be received by 23 June 2011.

http://sec.gov/rules/other/2011/34-64383.pdf

Summary of new EU rules from Clifford Chance

On 17 January, Clifford Chance published a report on the progress of certain legislative and regulatory initiatives within the European Union. Below is a list of the most significant areas of progress; however a copy of the full report for further reference is available here.

·      Several new authorities including the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) have been established and are now operational;

·      Several consultation papers were issued including EU Crisis Management, Securities Law Directive principles, Markets in Financial Instruments Directive and UCITS V, many with a 31 January 2011 deadline. Consultation conclusions will probably be issued in the second half of 2011;

·      In the first half of the year it is expected that a legislative proposal for disclosure rules relating to Packaged Retail Investment Products (PRIPs) will be finalised; 

·      There is ongoing work with regard to Basel III and Capital requirements;

·      EU Short selling regulations proposed in September 2010, look likely to be effective from July 2012.

·      EU AIFM directive to be implemented within member countries by 2013. The directive itself has been adopted by EU parliament; implementation is now being discussed with consultation and evidence on technical standards implementation being due later this month.

·      UK Retail Distribution Review, which commenced in 2006 and focused on commission fees, is now in final conclusion stages regarding the process for implementation. The RDR requirements will be effective from the end of 2012.

·      EU Corporate Governance review to make recommendations in May 2011 as a result of consultations on the Green Paper.

Clifford Chance produce very good ongoing summaries of this information from time to time and you can subscribe to their feed on their website.

Australia, Germany join the short selling disclosure fiesta

The following appeared on the ASIC website today:

0-42AD Short position reporting

Friday 5 March 2010


ASIC today has announced decisions made in relation to the following provisions introduced in the Corporations Amendment Regulations 2009 (No 8) (SR No 327 of 2009) (Short Selling Regulations):

•  
  • to delay the commencement of short seller obligations to lodge short position reports from 1 April 2010 to 1 June 2010; and
  • to reschedule the commencement of ASIC obligations to publish aggregated short position reports from 1 April 2010 to 21 June 2010.

The change in the commencement of the short seller’s obligation to report its short positions will allow short sellers more time to ensure they have the appropriate systems in place to meet their reporting obligations.

ASIC will facilitate an industry-wide pilot test to allow short sellers access to the new reporting infrastructure from 10 May 2010.

Additional information

To assist short sellers and systems developers adequately prepare for the new reporting requirements, ASIC has also revised Information Sheet 98, now titled Short selling: Short position reporting (INFO 98).

INFO 98 includes key tasks and practical information which stakeholders must be aware of prior to the revised start date for the reporting requirements. INFO 98 also contains details relating to the threshold for short position reporting and other technical amendments, as well as information about the FIX Rules of Engagement. In the period leading up to implementation, ASIC will regularly update INFO 98.

ASIC will shortly publish a revised Regulatory Guide 196 Short selling (RG 196). This document will contain more details about the decisions described above. Other updates in this document will reflect recent changes in the law, some exemptions provided to allow for certain naked short selling and guidance in relation to the disclosure and reporting requirements that apply.

Questions about short position reporting can be directed to shortpositionreporting@asic.gov.au or visit www.asic.gov.au/shortselling. for further information.

And in Germany:

Bloomberg Europe reports that "Germany’s financial regulator Bafin published rules requiring disclosure of short selling in stocks of banks and insurance companies including Deutsche Bank AG, Commerzbank AG, and Allianz SE, partially implementing a Europe- wide regulatory proposal."

These new developments follow on from the announcement in Hong Kong earlier in the week but more importantly from the announcement of its report into Hedge Fund Systemic Risk reporting by IOSCO.

Short Sale Roundtable Remarks

By Lisa Valentine

The Securities and Exchange Commission has wrapped up a two day roundtable to discuss securities lending and short sales. SEC Chairman Mary Schapiro told those gathered that “I have made it a priority to evaluate the issue of short selling regulation.”

Day one’s discussions focused on securities lending; day two focused on short sales, particularly “naked” short sales.

The SEC invited issuers, financial services firms, self-regulatory organizations, investors and the academic community to debate topics such as whether the SEC should move forward with a pre-borrow or “hard locate” requirement to eliminate abusive “naked” short selling and persistent fails to deliver. Schapiro mentioned that the SEC has heard plenty of comments supporting the SEC requiring that anyone effecting a short sell must borrow or arrange to borrow the securities prior to making the short sale.

In the area of securities lending, Irving Klubeck, managing director, Pershing, made the case that the securities lending market is pretty well regulated except for one area: finders who bring together buyers and sellers. Klubeck believes finders should be regulated, stating, “If finders are going to be brought into the mainstream of securities lending I believe they should be registered, capitalized, have standard guidelines and oversight as exists today with finders in the government fixed income markets.”

Mark Faulkner, with Data Explorers, agreed with Klubeck, saying that securities lending balances are 50% off their peak in May, 2008, indicating that the industry is able to self-adjust. He does warn that cash collateral and the subsequent cash re-investment needs to be evaluated.

John Nagle, managing director, Citadel Investment Group, called for centralized collection and dissemination of loan pricing data, saying that “central counterparties could reduce bilateral credit risk and foster rigorous and consistent credit risk management practices.”

Several speakers, including Leslie S. Nelson, managing director of Global Securities Lending, Goldman Sachs, called for changes to the Prime Brokerage No-Action Letter to require that prime brokers report any instances of clients’’ incorrect order marking (marking an order short when it really is long, and vice versa) and non-compliance with locate requirements to the executing broker.

On the issue of pre-borrow or hard locate, William Conley, managing director of Goldman, Sachs says the reforms are not needed since 99.9% of U.S. equity transactions clear and settle within the standard three day settlement period. He also mentioned that less than 5% of all locates result in the need to borrow.

At a time when liquidity is important, pre-borrows could lessen liquidity needlessly while increasing costs for market participants. The SEC should seriously consider these issues before implementing regulation that does more harm than good.

 

SEC Looking for Short Sale Comments

The Securities and Exchange Commission has set September 29 as the date for its roundtable on securities lending and short sales. Panelists have not yet been named. (The original date set by the SEC was September 30.) Although the SEC acted quickly to impose limits on short sales in April when it became clearer that short sales had at least some impact on the nosedive of the stock prices of banking and other financial firms, the agency has been mum about future restrictions on short sales.

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