What is it?
The emergency restrictions on the short-selling of financial stocks introduced by regulatory authorities at the height of the financial crisis continue to vex the securities industry.
Asset managers, brokers and investors complain that the restrictions have made markets less efficient. They argue there is no substantial evidence that the move has changed share price behaviour and are stepping up their campaign to have the bans rescinded.
Who dreamed them up?
Regulators around the world restricted short-selling in banks and other financial shares in September. Regulators acted because they believed that short-selling was responsible for large falls in the prices of financial stocks. It was, they said, giving rise to “disorderly markets” and creating further instability in the financial sector.
Countries that introduced bans included many in the EU (including the UK and Germany), Australia, Canada, Hong Kong, Indonesia, Japan, Mexico, Pakistan, South Korea, Switzerland, Taiwan and the US.
Although the UK’s Financial Services Authority (FSA) lifted its short-selling restrictions last month, it still requires firms to comply with a strict disclosure regime. Bans remain in the rest of the world.
What are the main provisions?
The provisions differ from country to country. But those introduced by BaFIN, the German financial supervisory authority, last September, are typical. The key statement was: “BaFIN... temporarily prohibited short sales (transactions resulting in a short position) of shares of the following companies from the financial sector.” It then listed 11 companies, including Allianz, Commerzbank and Deutsche Bank.
What’s in the small print?
The German ban was due to end on December 31, 2008, but this has been extended until March 31, 2009, when it will be reviewed again.
What does the industry say?
The Alternative Investment Management Association (the international hedge fund association), International Securities Lending Association and London Investment Banking Association want the bans to be removed. The associations commissioned London’s Cass Business School to research the effects. Researchers concluded there was “no strong evidence that the restrictions have been effective in reducing share price volatility or limiting share price falls”.
Alternative Investment Management Association chief executive Andrew Baker says: “We hope that other regulators around the world will take note of the FSA’s decision and lift the remaining short-selling bans.”
How much will it cost?
Mr Baker says it is difficult to “quantify the impact of the ban. But a number of our members who use short-selling as part of their trading strategy have reported damaging effects on their businesses.”
What do the law makers say?
The International Organisation of Securities’ Commissions (IOSCO) has set up a short-selling task force which will, among other things, “consider the effectiveness of the regulatory reactions to short-selling by its members”, says a spokesman. The task force will present its first report at the next ISOCO meeting in Washington, DC, this month. If it believes the bans have been effective, they are likely to remain.
The law of unintended consequences
“Banning short-selling interferes with the workings of the market by limiting price discovery, reducing liquidity and potentially creating an artificial market,” says Mr Baker.
Could we live without it?
Yes.
