Short selling is no riskier than any other buying and selling of securities and does not warrant specific rules, said the Association for Financial Markets in Europe (AFME) in its response to a European Commission (EC) consultation on short selling.
AFME said while it supports the EC’s objectives of harmonizing rules across Europe, reducing systemic risk and deterring abusive short selling, it believes that the EC has identified risks from short selling that do not exist.
AFME said that it agrees with the proposal to prevent short selling where the seller has little or no intention of covering the sale. However, the EC’s proposed ban on ‘uncovered’ short selling will not succeed in its aim of reducing volatility and could have the opposite effect.
On short selling disclosure AFME said that it generally supports moves to greater transparency but agrees with the Committee of European Securities Regulators (CESR) view that firms which engage in market making should be exempt from disclosure requirements on uncovered short selling.
AFME believes, however, that CESR’s proposal – that equity investors should publicly disclose their short positions to the market at very low thresholds – may expose them to unfair risks. Despite this, it is recognized that regulators need information to supervise market activity and therefore AFME does support the principle of private disclosure of short positions to regulators.
To enhance marketwide transparency for equities on a basis that is fair to all investors, the regulator could then publish the aggregated reported short position of the market. This would provide more value to investors than a list of individual disclosures, suggested AFME.
For fixed income, AFME advised against similar aggregated disclosure measures, since the potential adverse effects of such transparency on government bonds are not yet well understood.
Mark Austen, acting CEO of AFME, said: “We agree with many of the European Commission’s objectives and believe that disclosure should be made in a way that providers regulators with the information necessary for them to mitigate systemic risk. However, market participants strongly believe that the Commission’s recent regulatory proposals are disproportionate to the potential risks being addressed.
“Any regulation of short selling must also recognize the role played by banks and other liquidity providers that underwrite or sub-underwrite new share issues.
“In addition, we support the Europe-wide desire for a harmonized approach to regulation as the costs and increased complexity of complying with different regimes would be high and have a negative impact on market efficiency.”