EUROPE - The trade associations for securities lenders such as pension funds, and for hedge funds, have each criticized key planks in European Commission proposals to regulating short selling, issued today.
The International Securities Lending Association (ISLA) said public disclosure limits the EC has proposed for investors shorting shares of EU-based companies were "too stringent and threaten market efficiency".
Separately, hedge fund trade body the Alternative Investment Management Association (AIMA) said only regulators, and not the public, should be informed of individual short positions.
The contentious activity of shorting involves borrowing securities to sell, in the expectation their price will fall to allow their repurchase for less, and return to the lender at a profit.
Under the EU proposals, short sellers would have to reveal publicly net short positions of at least 0.5% of EU companies' share capital, and changes in these of at least 0.1%.
They would have to inform regulators at 0.2%, and of changes thereafter.
They must also inform regulators of any net short positions in sovereign debt of EU member states, including those taken via credit default swaps.
The proposals must still pass through the European Parliament and be discussed by EU member states. They would not take effect before late 2012.
But Kevin McNulty, ISLA chief executive, said this would "undermine market efficiency by reducing liquidity and price discovery, while also widening dealing spreads."
He added prime brokers and market studies suggest investors artificially reduce short selling to avoid public disclosure of positions.
Andrew Baker, AIMA chief executive, said: "The market should receive aggregate position reporting only."
The EC claimed in its report shorting could cause an "excessive downward spiral in prices leading to a disorderly markets and possible systemic risks".
However Baker said shorting bans "never worked, indeed all the evidence is that the bans during the crisis made the situation even worse".
He hopes curbs on the activity, which at least 14 regulators installed during the financial crisis and which Germany and Greece since revived, would never recur.
AIMA did, however, welcome the EC's attempt to create EU-wide, harmonised rules.
Baker said a major problem for his industry was some EU nations acted alone and, in his view, arbitrarily in imposing then revoking bans. "A common regime that concentrates on reporting, rather than bans is the way forward," he said.
The EC also recommended the European Securities Markets Group - an independent group of market participants advising the EC on shorting - be granted a role coordinating regulators' actions on short sale curbs.
ESMA should also be allowed to take cross-border action on banning shorting, it said, "where the situation has cross border implications, and competent authorities have not adequately addressed the threat".
Exchanges should have to publish daily short sale volumes, and short sellers be compelled to indicate where sales formed part of a short strategy.
The EC also proposed banning investors from short selling without first having borrowed securities, or arranged for this. Daily fines would hit those that failed to settle short trades.
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