Financial Regulatory Forum

Short-selling and CDS regulation in EU: Less to nakedness than meets the eye, funds and firms argue

By Peter Elstob

LONDON/NEW YORK, March 5 (Thomson Reuters Accelus) - Regulators and market participants continue to differ fundamentally over when a credit default swap should be deemed to be uncovered, or ‘naked’, and when investors are using CDS as a legitimate hedge. If a sovereign CDS can be demonstrated to be hedging counterparty or systemic risk, it can be exempted from the provisions of the proposed European short-selling regulation, which is aimed at abusive use of sovereign CDS by financial institutions to bet against countries’ debt.

Trade bodies argue that regulators should recognize various forms of ‘proxy’ hedging, including buying CDS for the debt of countries other than the one where the institution’s exposure lies — so-called ‘cross-border’ hedging’ — and ‘tail-risk’ hedges that may or may not turn out to have been necessary over a given period. They believe that the short-selling regulation (level 1) does not ban these strategies, and they should therefore be permitted (and so qualify for exemptions) in the detailed rules (level 2) that the European Securities and Markets Authority (ESMA) is still drawing up. (more…)

Shorting bans: What the four European regulators are prohibiting (and what they’re not)

By Peter Elstob

LONDON, Aug. 15 (Thomson Reuters Accelus) – The bans on short-selling the shares in a number of banks and insurance companies (and one stock exchange) that four member states imposed on Friday did not bring the single European rulebook any closer.

However, the European Commission will be hoping that the separate initiatives by the Belgian, French, Italian and Spanish market regulators, which came out of “coordinated discussions” during a conference call on Thursday evening involving all 27 members of the European Securities and Markets Authority, do not put it further away.

Some of the details of each national action are set out below, and they do indeed appear to be harmonised, at least to an extent. More detail, and also any updates to the lists of issuers included, should be sought on the respective regulators’ websites.

Get Shorty: Europe’s Crackdown on Short Selling (Westlaw Business)

People walk in front of a shop of French luxury fashion brand Louis Vuitton decorated for the Christmas holiday season in Bordeaux, south-western France, December 23, 2009. REUTERS/Regis DuvignauBy Christopher Elias,  (Westlaw Business)

Radical changes to Europe’s system of financial regulation are under way and with them a harmonisation of securities rules as Europe turns a corner on the drive to create a single European Securities and Markets Authority with more stringent disclosure requirements. But with not all European regulators striking the same note, the move for greater scrutiny and heightened disclosure expectations over short selling and shareholdings is making sluggish progress forward. (more…)

Can hedge funds double dip under Dodd-Frank whistleblower rules? (Westlaw Business)

By Jesse R. Morton

NEW YORK, Jan 6 (Westlaw Business) – Whistleblower provisions in Dodd-Frank may have handed hedge funds a golden opportunity and the SEC a unique challenge.

Funds have long conducted unique analyses that power their trading strategies and at times prompt quite public “revelations” of possible funny business. Think Greenlight Capital’s company-shaking revelations about Lehman Brothers in 2008 and Allied Capital in 2002.

Though the law remains unclear on this issue, its quite-intentional similarity to pre-existing approaches under the False Claims Act and the whistleblower program of the IRS may provide funds with a profitable two-fer. Though not necessarily the intent of Dodd-Frank’s enacters, one is left to wonder as to the role of shorts, touted (by shorts), as de-facto enforcement division of the SEC. (more…)

Germany wants reports of bank-stock short positions

FRANKFURT, March 4 (Reuters) – German financial watchdog Bafin will introduce new rules this month requiring reporting of short sale positions in major German financial stocks.

The new rules, which come into effect on March 25, will let Bafin intervene effectively if it determines that short positions may threaten financial stability, the watchdog said in a statement.

Short-sellers are investors who borrow shares and sell them on in the hope of buying them back at a lower price to make a profit.

EU starts rollout of share short-selling regime

By Huw Jones

LONDON, March 2 (Reuters) – Securities regulators in the European Union said on Tuesday they will start rolling out requirements for reporting net short positions in shares as part of wider efforts to improve transparency in markets.

Short selling of shares is a practice favoured by hedge funds and involves selling a stock that is not already owned, in the hope its value will fall by the time a purchase is required to settle the trade. The difference in price is pocketed as profit.

Interim short selling curbs were introduced by some EU states in late 2008 when bank shares came under pressure, but regulators want a single, bloc-wide regime to end confusion among investors.

SEC short-sale curb may apply to market makers -sources

   WASHINGTON, Feb 23 (Reuters) – U.S. securities regulators are considering new short-sale restrictions with no exemptions for market makers, people familiar with the regulators’ plans said on Tuesday. (more…)

Germany prepares tougher short-selling rules-paper

   By Matthias Sobolewski
   BERLIN, Feb 23 (Reuters) – German financial watchdog Bafin is preparing tougher rules on the short-selling of shares in big financial sector companies, a coalition document showed on Tuesday. (more…)

US SEC to mull short-sale curbs in coming weeks

WASHINGTON, Feb 5 (Reuters) – U.S. securities regulators will consider short selling curbs in “coming weeks,” Securities and Exchange Commission Chairman Mary Schapiro said on Friday.

The SEC has proposed a number of ways to curb short-selling, or investors making bearish bets on stocks.

Those proposals include market-wide curbs and so-called circuit breakers that would impose a restriction on short-selling if a stock fell by a certain percentage.

BREAKINGVIEWS-Chinese short-selling will be no bear’s picnic

By Wei Gu

HONG KONG, Jan 25 (Reuters Breakingviews) – Hedge funds watching China’s markets are licking their lips at what they see as the best shorting opportunity since Enron. But while plans to allow short-selling are imminent, this won’t be a bear’s picnic. Beijing’s plans to allow two-way equity bets will give foreigners little chance. Borrowing individual stocks will be tricky, even for locals.

After many countries such as the United States and UK put more severe restrictions on short-selling, China is taking the contrarian view. The short-selling regime has been three years in the making. The goal is to allow investors to express a different view on the market, and prevent market valuations getting overly stretched.

For now, foreigners are not invited. They can only short the broad market though index futures, not individual stocks. Foreigners now own up to $15 billion of China stocks through the qualified foreign institutional investor scheme. Their shorting quota is unlikely to exceed 10 percent, or $1.5 billion — just 5 percent of the daily turnover.

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