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)
By 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…)
If hedge funds can’t double dip, it’s time they fired their lobbyists and attorneys who should have paid off Congress and ensured the presence of loopholes in the Dodd-Frank Bill. Come on guys, sonny needs a brand new BMW for having graduated from private school — and the cost of an Ivy League education is only going higher.
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.
Bafin’s new rules will require the seller to report to Bafin net positions that exceed 0.2 percent of shares issued and make further reports for each 0.1 percentage point change from that level.
Positions from 0.5 percent and above will be published in anonymous form on Bafin’s website.
At the end of January, Germany ended a partial ban on the short-selling of financial stocks, letting a measure designed to reduce trading volatility lapse, but the coalition government in Berlin indicated that tougher regulation was being prepared.
Bafin’s new rules affect shares in the following companies:
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.
The Committee of European Securities Regulators (CESR) said it has submitted a report to the EU’s executive European Commission in which it recommends the introduction of a pan-EU disclosure regime for net short positions in shares.
For copy of report click on http://www.cesr.eu/popup2.php?id=6487
It stops short of recommending an outright ban, which some EU states introduced temporarily, saying legitimate short selling plays an important role in financial markets by contributing to price discovery and increasing liquidity.
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.
Schapiro also said the SEC would consider proposals to consolidate some aspects of market surveillance, which is currently shared by in-house teams at trading venues and broker-dealer watchdog the Financial Industry Regulatory Authority.
“It is difficult to connect the dots and ferret out wrongdoing as trading activity frequently occurs across various markets and each market is only able to readily see trading activity conducted in their own market,” Schapiro said at a Practising Law Institute conference in Washington. (Reporting by Rachelle Younglai, editing by Gerald E. McCormick) ((rachelle.younglai@thomsonreuters.com; +1 202 898 8411)) ((Multimedia versions of Reuters Top News are now available for: * 3000 Xtra: visit http://topnews.session.rservices.com
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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.
But even locals won’t get much of a look-in. Brokerage firms will only be able to lend out stocks that they own, unlike other markets where short-sellers can borrow from pension funds, insurance companies, and custodian banks. Chinese insurance companies, who buy and sell at a rapid rate, are unlikely to lend stocks out for a long period anyway.
Even limited short-selling may sound better than none. Except the market regulators are also making it easier for stocks to go up, by enabling trading on margin. Investors can soon buy index futures with just a 12 percent cash outlay, and borrow the rest. Chinese mutual funds look stretched now with 84 percent of their money already invested into stocks, which is a record. Margin trading will give them more firepower.
China always likes to cross the water by feeling the stones. Since the idea of short-selling is a political hot potato, and many of the stocks listed in China have substantial state ownership, fear of bears running rampant is understandable. That is a shame: with the Shanghai index trading at half its 2007 peak, now would have been a good time for bolder changes.
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