The International Organization of Securities Commissions (Iosco) has called for "a more consistent international approach" to the regulation of short selling.
Iosco's Technical Committee said in a consultation report yesterday that "a stringent regulatory system is not enough to deter abusive market behaviour", and appealed to regulators to implement "appropriate controls", a new reporting regime and a compliance and enforcement system for regulating short selling.
The report proposed disciplinary procedures for settlement failures, such as compulsory buy-ins for traders who "short sold with no intention of or reasonable plan for delivery". In addition, reporting of large short positions and of suspicious activities should become mandatory.
However, obtaining short-selling information could prove troublesome, the report cautioned, as it could spur a migration of trading activity from shares to derivatives, which would be more difficult to monitor, especially if traded over the counter. Also, revealing trading information could expose short sellers and "subject them to a potential short squeeze".
Additionally, a more comprehensive compliance and enforcement system should be implemented, the committee said, whereby regulators have investigation, surveillance and enforcement powers, and where information can be requested not only from domestically licensed entities, but also from firms or individuals outside of sovereign borders.
However, while Iosco wants to crack down on the abuses of short selling, it conceded that "short selling plays an important role in the market for a variety of reasons, such as providing more efficient price discovery, mitigating market bubbles, increasing market liquidity, facilitating hedging and other risk management activities".
"The short-selling regulation regime that the Technical Committee envisages is one that should not stifle legitimate short-selling activities", the report continued. Permissible activities may include hedging, market making and arbitrage activities that "provide benefits and are unlikely to pose risks that will destabilise the market".
The deadline for responses to the consultation paper is May 4, by which time a short-selling ban will be lifted in Germany. However, similar bans will remain until May 31 in Italy and June 1 in Austria. In the UK, a four-month short-selling prohibition of 34 financial stocks was lifted on January 16, and in the US a ban imposed on September 19 was lifted on October 8.
Iosco's report has already been well received by some market participants. Andrew Baker, chief executive of the Alternative Investment Management Association, said that the report was "admirably sensible".
The week on Risk.net, November 25-December 1, 2016Receive this by email