Yesterday CESR produced a consultation paper proposing a uniform approach in Europe for short selling disclosure. You can access the paper by clicking here or the press release here.
I haven't had a chance to read the paper (yet more documents piling up for holiday reading) but the headline is that they are suggesting that a two tier reporting requirement should be implemented. The first level - private disclosure - would require that the short seller disclose to the regulator of the market where the stock is most liquid when a short position crosses 0.1% of the issued share capital. There would be a further stepped reporting requirement of 0.10% increments. Once a short position has passed the 0.50% level, CESR is proposing public disclosure. What goes up can also go down, so there is a similar requirement to report as the short position decreases. Importantly, CESR also wants to include both exchange traded and OTC derivatives when calculating the net short position.
This makes the CESR proposals different from other operating regimes. First, it is wider in scope than the UK regulations which only addresses financial stocks. Second, the reporting thresholds are lower than that of the UK, but the same as recently introduced in Greece. The idea of a private level and a public level is interesting. The most significant divergence from other proposals and regulations is the concept of a net position including other instruments. I need to think this through a bit and speak to some people who are smarter than me, but it is an interesting idea.
My thoughts at the moment:
- 0.10% is too low. It will create a substantial additional reporting workload for a questionable result. The key point to remember is that the short selling bans did nothing to support share prices and there is credible evidence that the bans damaged markets and investors. So what value is there in such a low trigger point?
- Few have any problem with reporting positions to the regulator as a concept, but it needs to be a workable level.
- Many do have problems with making their trading positions public. Why should they be required to show their hands? Why is the disclosure of short positions so much more important than the disclosure of long positions - if the public needs to know, then it should apply symmetrically. I will again briefly mention what happened with L&G shares in February this year. Public disclosure of positions helped generate additional profits for the short seller and did nothing for the public.
- The idea of netting against other positions is very interesting, but seems like it will be difficult to define and must inevitably generate very onerous additional calculation, reporting and compliance requirements. It would eliminate those positions where a direct hedge takes place, but would it include different share classes, related instruments, long index futures vs some short underlying positions, offset positions from different trading books or locations, etc. etc.
The CESR consultation period on this proposal goes until 30 September 2009.
