It’s fair to say that regulators are approaching short selling rather… differently depending on where they are in the world. But could these differences of approach throw a spanner in the works for globalisation – or at least, for any attempts at a global regulatory framework?
It is a bit of a mess. An uptick rule, courtesy of the SEC; pumped-up disclosure thresholds, thanks to Europe’s CESR; or perhaps even a ban on naked shorts, as planned by the German finance ministry.
The EU’s internal markets commissioner Michel Barnier also proposed a framework for a short selling ban on Wednesday, as the FT reported. The move is reflective of the irruption of the Greek naked CDS circus into what is a much wider debate.
Mix it all together, Deutsche Bank Research argued in a note on Thursday, and we may just end up with a major, long-lasting regulatory headache (emphasis ours):
Market participants are faced with an increasingly fragmented landscape of short-selling rules around the globe. This raises costs of compliance, complicates the assessment of market conditions as disclosure standards differ, and increases legal risks regarding failure to meet local standards.
Short-selling regulation is a further case in which the G20 spirit of close cooperation on regulatory responses to the crisis has got lost. Better coordination is desperately needed.
The US and the EU should do their utmost to arrive at an equivalent regulatory framework for short selling. Anything else will create competitive distortions and weaken the effectiveness of stability-oriented regulatory policy.
The G20 spirit is already a bit tattered from the ongoing US-EU dispute over hedge fund regulation, as the Geithner letter recently demonstrated – so even if both sides did their utmost on this issue, it might not be enough.
And to get a flavour of that ‘increasingly fragmented landscape’, you can view a huge and very helpful chart comparing worldwide short-selling rules here – click to enlarge:
Daunting, to say the least, and all the more so after Barnier’s intervention. It’s useful, then, that DB Research’s note also features this defence of the economics of naked shorting:
Naked short sellers can get into market disruptions when too many of them rush to the exit trying to cover their positions in an insufficiently liquid market. The effects on prices of such a situation can be significant.
Regulators should be aware, however, that the impact of short selling is only gradual. If market participants lose trust in an asset, they will always sell it, and modern technology allows them to do so very fast. Limiting naked short selling will therefore not prevent drastic price declines of troubled companies. They will occur anyway. What a ban of naked short selling does, however, is eliminating an important early warning indicator for mispriced assets and market bubbles.
Someone tell the commissioner, please.
Related links:
My big fat short-selling deterrent – FT Alphaville
Short-selling world wide – FT Alphaville
Russia market watchdog bans short selling again – FT Alphaville
Moscow, London, Washington – evil shorts have no where to hide – FT Alphaville