European Firms Oppose Public Disclosure of Short Sales
July 28, 2010
Disclosing short-positions on shares to regulators is fine, but don’t make the information public.
That’s the general interpretation on both sides of the Atlantic to the European Commission’s request for comment on June 14 on how to deal with short selling.
The comment period ended on July 10.
The EC’s goal is to curtail a practice known as naked short selling whereby a short-seller has not borrowed the securities that are the object of the short sale.
When this happens, a settlement failure could occur and the stock price could become more volatile.
Germany’s regulatory agency, Bafin, in May imposed a ban on naked short selling. The new U.S. financial reform bill also proposes that the SEC create requirements for investment advisers and broker dealers to disclose information on short selling activities. But the legislations is more about the number of short sales rather than short positions held.
In 2009, the SEC did away with the SH report which required the disclosure of short sale positions.
The negative reaction to the EC’s proposal was widely expected as fund managers have already expressed concerns about the public disclosure of short positions on the basis of harming liquidity and increasing costs.
And there is little evidence they believe that the recent Greek sovereign debt crisis has been worsened by naked short selling.
The European Commission has suggested that when it comes to equities firms operating in the European Union – with the exception of market makers – follow a two-tiered disclosure model already proposed by the Committee for European Securities Regulators. Under that system, short sellers would first disclose to their national regulators at the end of each trading day where their net short position reaches 0.2 percent of an issuer’s issued share capital.
Each subsequent movement of 0.1 percent of issued share capital either upwards or downwards above that 0.2 percent threshold will then trigger further disclosure obligations to the regulator. However, once the net short position is greater than 0.5 percent of the issuer’s issued share capital, the short seller will have to make a second disclosure to the public at large. Firms would have to calculate the net short position at midnight of each trading day and the disclosure must be made no later than 3:30PM the following day.
Deutsche Bank said that disclosure could increase costs for the entire market. “There are estimates that short sellers are responsible for 20 percent to 30 percent of all equity trading volume,” wrote the bank. “Research has shown that public disclosure decreases short sellers’ participation in equity markets by 20 percent to 25 percent. The decrease in liquidity means a decrease in trading volumes and a widening of bid-ask spreads. Price discovery becomes less efficient and intraday volatility increases.”
The Investment Management Association, the London-based trade group for asset managers, and the Managed Funds Association, the Washington, D.C., trade group for alternative investment fund managers, agreed that increased transparency may actually be harmful. “The proposed market disclosure is not necessary to resolve the potential problems identified, and could exacerbate some of the problems, when they do arise,” said the IMA. “Public disclosure of short positions could seriously harm: investment managers, other investors and the market by reducing efficient price discovery, increasing volatility and spreads.”
