LONDON (HedgeWorld.com)–The Financial Services Authority published a discussion paper resulting from the roundtable on short-selling it hosted last month.
The paper seeks views on a range of policies that might increase the markets’ transparency: the reporting and publication of short sales in the cash equity market; the reporting and publication of short positions in the cash and derivatives markets; the reporting and publication of only specific variants of short sales that raise settlement or conflict-of-interest problems; or the publication of securities-lending data as a proxy for short selling.
“Our view remains that short selling is a legitimate investment activity which plays an important role in supporting efficient markets. We therefore see no case for any prohibition or restriction on short selling,” said Gay Huey Evans, the director of markets and exchanges of the FSA, in a statement issued with the release of the 40-page discussion paper.
Mr. Evans’ statement also acknowledged “short sales contain information that may be relevant to many market users,” so the FSA seeks views on which option or combination of options will provide the market with the information it needs for effectively processing that information.
The first approach considered, the publication of short sales in the cash equity market, would bring the United Kingdom’s regulatory system in line with that of several other jurisdictions, including the United States. “The benefit,” according to the discussion paper, “is that the market can see the extent of aggregate short selling in any particular security and draw its own conclusions from that information.” One of the issues that the United Kingdom would have to address in adopting such a system, though, is timeliness. Monthly publication (as in the United States) yields data considered too out of date by many participants. Publication on a daily basis “might raise a feasibility issue.”
The second approach, reporting and publication mandates for a broader range of short positions, would raise graver questions of feasibility and costs as well as of definition.
“Would such a regime capture, for example, shorting the FTSE index; short selling and American Depositary Receipt; short selling one stock and going long several others as a long/short strategy; shorting a [contract for difference] or spread bet position; or structured trades involving a short position?” the paper asks.
The third approach, the use of stock borrowing as a proxy for short selling activity, is both feasible and low cost but may be less helpful than direct information.
“In its raw form this data involves considerable double counting because of the significant involvement of intermediation in this market. As such, there is a question mark over how useful the data would be to the market.”
Finally, the paper said that the FSA might address specific types of short selling, rather than imposing a single global regime. For example, it might specifically address concerns that naked short selling threatens orderly settlement and require the reporting and publication of the volume of that practice. Or it might require directors to disclose the short positions they take in the stock of the firms on whose boards they sit.
The period for discussion responses closes on Jan. 31, 2003.