Regulate your way to success!

When government pundits run out of ideas on how to fix things, they inevitably turn to transparency.  That is where we are now. "Surely more transparency will save us all."  How do we get transparency – Regulations of course.

This past weekend, EU leaders agreed on draconian measures to crack down on hedge funds.  Although they haven’t provided details of their agreement, you can assume that transparency is a cornerstone of their proposals.

The Alternative Investment Management Association, the trade body for the hedge fund industry has itself launched a new transparency initiative, perhaps in an attempt to pre-empt or help shape any future disclosure requirements.  Included in their platform is increased transparency of significant positions and risk exposures as well as more short position disclosure to national regulators.

Earlier in the week, the Reserve Bank of Australia announced a new disclosure regime that will require all stock exchange transactions involving borrowed shares to be reported by stockbrokers at the end of each day.  The Stock Exchange will then publish the information in order that small investors will be fully informed.

In the UK disclosure is required whenever a short position reaches a quarter of a percent of a company’s issued share capital. 

Even emerging markets are getting into the game.  Last year Hungary required that investment firms disclose all short sales for positions that exceed .01% of a company’s listed shares.

So we’ve seen lots of regulations implemented and proposed.  What’s the impact of all of this?

The UK media picked up some short sale disclosures in one insurance company last week proclaiming the “King of Short Sellers” had driven down the stock price.  This was the headline despite the fact that the company’s share price has been on a downward trend for almost two years.  Then when the disclosure announcement came that the King had reduced his position below the reporting requirement, this coincided with a share price rise. 

The Hungarian regulations – at a very low hurdle rate resulted in exactly zero disclosures last year.  Yet the government has moved recently to enshrine this as law.

Will small investors in Australia really benefit from the disclosure of every short sale.  Given that there isn’t any context of that short sale, will it inform or mislead?

The short selling bans and restrictions have not been shown to benefit, support or protect share prices.  In fact Christopher Cox (pictured above), the former head of the SEC in the US is on record as saying that imposing the short selling restrictions was the biggest mistake of his career, but that the political pressure was overwhelming.

While the short selling ban in the US didn’t do anything to protect share prices, it had a dramatic and negative impact on beneficial owners and the securities lending industry.

Will the transparency that results from these regulations bring any value to the public or is it a political exercise playing to the media and the masses.  Regulation without justification, explanation or analysis is hardly likely to help the markets get out of their current turmoil. But the politicians are hoping it will at least distract us.