(The article featured
below is a selection from International
Securities and Financial Reporting Update, which is available to subscribers
of that publication.)
German and U.K. Securities Regulators to Extend
Prohibitions on Naked Short Selling
The German Federal Financial Supervisory Authority
("BaFin") has extended its ban on naked short selling in the shares of
financial companies to January 31, 2010. This is BaFin's third extension of the
prohibition, which was adopted in September 2008. The companies affected by the
ban include Allianz SE, Commerzbank AG and Deutsche Bank AG. BaFin promised to
promptly lift the ban in the event of a far-reaching stabilization of the
markets.
Similarly, the U.K. Financial Services Authority proposes to extend the
disclosure regime for significant net short positions in U.K. financial
companies. The U.K. extension would have no fixed time limit. While
acknowledging that market turbulence has lessened somewhat since the start of
the year, the FSA believes that conditions are such that the enhanced
transparency provided by the special regime remains warranted.
The FSA emphasized that it does not intend for this to
be a permanent regime. The FSA expects that the disclosure regime would either
be superseded in due course by broader permanent disclosure measures, preferably
agreed on an international basis, or be revoked. The FSA reaffirmed its belief
that short selling is a legitimate investment technique in normal market
conditions.
At the same time, the Australia Securities and
Investments Commission lifted the ban on short selling in the stock of financial
institutions, noting that the balance between market efficiencies and potential
systemic risk has now moved in favor of the ban being lifted. The Commission's
approach to short selling during the crisis has now gone through three phases.
In early 2008, the Commission resisted considerable pressure to impose a ban
because the ASIC felt that the benefits of short selling outweighed possible
systemic issues. Later in the year, the Commission imposed a ban when the
combination of lack of confidence in the market and the state of the
international financial markets put the odds too much in favor of the short
sellers. The third phase is the gradual lifting of the ban. In November 2008,
the Commission reopened the securities of non-financials to short-selling, but
concern with potential systemic issues in the financial sector remained until
now, when the ASIC has reopened the financials.
Bafin defines naked short selling as when sellers sell
shares which they do not own or for which they do not have a plea-proof claim to
transfer of title in shares of the same class at the time of the transaction. By
influencing the prices of the stocks specified, transactions resulting in a
short position or in the increase of a short position (referred to as short
selling transactions) in shares within the meaning of the ban would, by reason
of the importance of the companies for the aggregate economy, reinforce this
development and result in further excessive price movements, thereby
jeopardizing the stability of the financial system.
BaFin noted that short share positions created by the
exercise of option transactions are not subject to the ban. Although the sale of
a short call option is a transaction, it does not yet result in a short position
in shares. The short position arises only when the call option is exercised,
explained BaFin, since it is only at this point of time that a delivery
obligation arises with the option writer. Similarly, BaFin said that the ban
does not extend to the sale of futures since the decree only refers to naked
short transactions in shares.
The BaFin ban does not apply to short sales backed by
securities lending. The decree only prohibits naked transactions in the
specified shares that are not backed by securities lending. According to BaFin,
the securities lending transactions have to have been concluded prior to, or at
least simultaneous with, the respective transaction. It is sufficient that at
the time of the conclusion of the transaction an absolutely enforceable legal
claim on the borrowed shares already exists. It is not necessary that the shares
have already been booked into the account of the borrower.
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