EU watchdogs plan short selling regulation

By Huw Jones

LONDON (Reuters) - European Union regulators unveiled proposals on Wednesday to force short sellers of stocks to publicly disclose significant positions in a bid to crack down on those who abuse the market.

Short selling is a practice often favored by hedge funds and has been criticized by policymakers for amplifying bank share sell-offs.

Market watchdogs in several EU states began unilaterally introducing short selling curbs when shares in banks came under heavy pressure following the collapse of Lehman Brothers investment bank in September.

The Committee of European Securities Regulators (CESR) said it was time to launch a policy review with the aim of devising pan-European standards for short selling.

"CESR is of the view that a pan-European regime for enhanced transparency of short selling should be implemented on a permanent and harmonized basis ... by introducing European legislation in this area," the regulatory body said in a statement.

Regulators have been criticized by exchanges for their lack of coordination in what has become a single capital market in the EU where the same blue chips can be traded on several pan-EU trading platforms and exchanges.

Hedge funds are often cited as favoring short selling whereby unowned stock is sold in anticipation its price will fall, thereby generating a profit when it comes to buying the shares later on to settle the trade.

IOSCO, a global regulatory body, has said the best way to tackle abusive short selling is through penalizing failures to settle trades to encourage pre-borrowing of stock before selling it short.

In the United States an interim rule requires big investors and hedge funds to disclose their short position to the regulator only and the Securities and Exchange Commission is set to decide soon on whether any public disclosure should be made.

Exchanges say there is no concrete proof that the short selling curbs stopped the fall in bank shares. CESR said it was focusing on disclosure to discourage large scale short selling.

In the absence of an EU law, CESR is proposing a short-selling regime based on disclosure for all shares, not just financial stocks typically covered by national initiatives.

"Requiring the reporting of significant short positions to the regulators would better enable them to identify which market participants are taking the lead in shorting financial instruments and, when necessary, to pursue enquiries with participants suspected of abusive short selling," said Kurt Pribil, chair of CESR's policy committee.

"Imposing a requirement for short positions to be disclosed publicly to the market as a whole will provide a potential constraint on aggressive large-scale short selling," Pribil said.

CESR is proposing a two-tier system of disclosure of significant net short positions, one kept private, the other publicly disclosed.

The private disclosure threshold would be set at 0.1 percent of the company's issued share capital, with the position made public once it reached 0.5 percent.