Cesr proposes Europe-wide disclosure of short positions

Investors across Europe could be compelled to reveal short positions in any stock, under draft rules published today by the Committee of European Securities Regulators (Cesr).

The Committee proposed in a consultation paper today that short positions equivalent to 0.1% of the company be reported to national regulators, and positions of 0.5% be revealed to the market at large. Changes of more than 0.1% in net short positions should also be reported. The rules would cover short exposure through derivatives holdings as well as cash short positions, but would not cover market-making activity. Cesr did not suggest any limits on short selling, saying it had "prioritised" the disclosure rule and would continue to consider bans and price limits in future.

The new rules, unlike many of the temporary short-selling bans instigated by regulators in 2008, would cover all stocks, not just financial stocks. Cesr argued the next market turbulence could occur in any sector, and that if short-selling disclosure was a good idea for banks it must be a good idea for any stock. It added there was some evidence banning shorting of banks in 2008 had displaced shorting activity to other related sectors such as construction, making them even more volatile.

Regulators around the world imposed limits on short selling last year to restrain the plunging prices of financial stocks. The UK Financial Services Authority (FSA) and the US Securities and Exchange Commission (SEC) hurried out short-selling bans on September 18 and 19 respectively, with other national regulators following suit. In fact, one study suggested, banning short selling simply made financial stocks even more volatile.

Already this year, international bodies such as Cesr and the International Organisation of Securities Commissions (Iosco) have attempted to bring the various national regimes into line. Iosco called in April for a single set of principles to make compliance easier and prevent regulatory arbitrage. Today's Cesr proposal follows the FSA's lead in proposing a 0.5% net limit for public disclosure.

Many regulators, including the SEC, are considering permanent bans or restrictions on short selling, including bans on naked shorting, uptick rules that only permit shorting when the stock price is rising, and circuit-breakers, which block shorting once a stock has fallen more than a set amount. Such restrictions should be necessary as temporary emergency measures, Cesr said, adding it was looking into whether individual regulators had the power to impose them.

See also: FSA extends short-selling disclosure requirement again 
Regulators review short-selling restrictions 
SEC roundtable: circuit breakers most favoured short-selling rule
Short-selling ban increased volatility more than credit crisis 
The short story