Global watchdogs crack down on some short selling

LONDON (Reuters) - Global market supervisors sought on Friday to forge a more common approach to regulating abusive types of short-selling of shares by cracking down on settlement failures and stopping short of an outright ban.

The International Organisation of Securities Commissions (IOSCO) policymakers adopted four principles its members agree to apply in their own markets to oversee a trading strategy critics say amplified the effects of the credit crunch.

The principles broadly cover the need to maintain market stability, and for effective reporting regimes and enforcement.

IOSCO comprises market watchdogs from over 100 countries, including the United States, Japan and the 27-nation European Union, who regulate over 95 percent of the world's securities markets.

Short selling is the sale of shares not already owned in the hope prices will fall. Many countries introduced curbs from last September after the collapse of Lehman Brothers bank which sparked heavy selling in financial stocks.

IOSCO said there was a need to punish failures to settle trades. The aim is to crack down on naked short selling whereby no prior share borrowing arrangements were made in time.

"As a minimum requirement this should impose strict settlement, such as compulsory buy-in, of failed trades," IOSCO said in a statement.

By focusing on tackling settlement failures, regulators can avoid a legal minefield of defining naked short selling and pre-borrowing, said Martin Wheatley, chief executive of Hong Kong's Securities and Futures Commission SFC.L who chaired IOSCO's short-selling task force.

"This has the effect of putting a brake on naked short selling without having to go into legal and definitional problems," Wheatley said.

A study of the market impact of restrictions on short selling for the SFC revealed only negative effects such as a widening in spreads, reduced liquidity and making some types of trading strategies impossible, Wheatley said.

"I have not seen anything that makes the other argument that these bans were a good thing and helped to stabilise prices," Wheatley said.

Short selling is a favoured trading strategy of hedge funds, a sector that has also come under heavy regulatory scrutiny in the credit crunch.

Stock exchanges have slammed the lack of coherence among national regulators on short selling curbs, adding there is no compelling evidence the measures worked.

IOSCO rejected attempts to adopt a unified approach, saying some national differences will inevitably remain.

The four principles are:

-- there should be appropriate controls to ensure stable and orderly markets;

-- there should be a reporting regime that provides timely information to the market or to market authorities;

-- it should be subject to an effective compliance and enforcement system;

-- regulation should allow appropriate exceptions for certain types of transactions for efficient market functioning and development.

The Committee of European Securities Regulators CESR.L which groups national market supervisors in the 27 EU states is due to come out with a refined version of the principles.

(Reporting by Huw Jones; Editing by Greg Mahlich)