Finance

SFC seeks to tighten rules on short selling

PUBLISHED : Tuesday, 24 March, 2009, 12:00am
UPDATED : Tuesday, 24 March, 2009, 12:00am

The Securities and Futures Commission said yesterday it would seek legislation requiring fund houses and institutional investors to report their short-selling positions in Hong Kong-listed securities as part of an international effort to tighten regulation on the activity.

The SFC's proposal came after the International Organisation of Securities Commissions (Iosco) announced several principles that regulators worldwide should follow to tighten oversight on short selling. These include a better settlement arrangement for short sellers, an improved reporting regime and more effective enforcement, although there will be certain exemptions.

'There is a general concern that in extreme market conditions, the use of short selling in combination with certain abusive strategies may contribute to disorderly markets,' said SFC chief executive Martin Wheatley, who chaired an Iosco task force that studied short-selling rule changes.

Iosco groups more than 100 securities agencies, including regulators from Britain, the United States, Europe, Hong Kong and the mainland. It hopes to establish international rules to help regulators co-operate in thwarting market malpractices.

Mr Wheatley said since the financial crisis in 1997, Hong Kong had adopted a tight short-selling regime.

The only Iosco principle that would affect the local market was a call for new reporting requirements by fund houses or other investors. Those who short sell Hong Kong stocks, if they meet a certain threshold, will have to be disclosed to the market and regulators at the end of the trading day or the next day.

In the US and Britain, the reporting threshold is a short sale of 0.25 per cent of the total issued share capital of the underlying stock. In Hong Kong, short sellers only need to tell brokers to report individual short-selling trades to regulators.

'The new proposed reporting requirement will add transparency to short selling in the Hong Kong market,' Mr Wheatley said.

He added that the commission would collect views about the Iosco proposal until May 4. The SFC will then issue a consultation paper on the details of the regulation, such as whether Hong Kong should also follow the 0.25 per cent threshold rule adopted in the US and Britain.

Short selling has come into focus over concern it may add selling pressure in market downturns. Britain and the US banned short sales of financial stocks for a period since the end of last year. But Mr Wheatley said such a ban was not needed in Hong Kong since it had tighter regulations.

For example, Hong Kong requires short sellers to first borrow stocks to prepare for settlement before they can sell short, a requirement Iosco suggests the US, British and European markets follow.

Legislator Chim Pui-chung, who represents brokers, said he supported the SFC's tighter measures on short selling, but they had come too late. 'After the consultation and the law change process, the short-selling rule may only be tightened next year or even later,' he said. 'The financial crisis may be over already.'

However, Mr Wheatley said Iosco's suggestion would bring standard regulations to the world even after the financial crisis passed.