Mark Hynes - thoughts on corporate disclosure

Opinions on changing rules, changing best practices, and their effect on investor relations officers.

Thursday, June 19, 2008

Short selling disclosures - not enough to cure abuse

I certainly didn’t expect such a fast reaction! The Transparency Matters post on May 7th considered the ways in which short selling disclosures were evolving around the world, and highlighted actions in the US, in Australia and Hong Kong. And we highlighted a little reported comments from the FSA Chairman noting these disclosures were a “reasonable proposition”.

The new rules published by the FSA on Friday limit short selling disclosures to stocks undergoing a rights issue. Clearly the FSA has in mind the potential for market abuse. An investor borrowing stock to short and close out later on at a lower price, could, in theory spread rumours to drive the price down.

However, the FSA should intensify still further its work on identifying potential market abuse – whether through short selling or not, and whether in connection with a rights issue or not. (Anyway, are we going to see a reduction in rights issues and more funds coming in from sovereign wealth funds to support banks’ balance sheets, as we have at Barclays this week?).

The UK Chancellor has said that this intervention is temporary, and that regulators will look for a permanent solution.

This will not be easy. The best the FSA could do in its earlier consultation in 2002 was to arrange for CREST to publish stock lending data as a proxy for short selling levels. Since a (prime?) reason to borrow UK stock is for dividend washing (to take advantage of lower tax regimes in other countries), the coherence between stock lending and short selling is at best limited.

The only country that (as far I know) has a working regime is Hong Kong.

It will also be interesting to see how alternative investors manage the mechanics of these disclosures, that will have to be made through a regulatory information service. With a deadline of this Friday, regulators have not given investors a great deal of time to get this organised.


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