News
The Investor Relations Society together with other partner societies from the Global Investor Relations Network has responded to the IOSCO consultation on short selling:
Mr. Greg Tanzer via e-mail: ShortSellingReport@iosco.org.
Secretary General
IOSCO
C / Oquendo 12
28006 Madrid
Spain
4 May 2009
Dear Mr Tanzer
Re IOSCO consultation on short selling
We much appreciate the opportunity to comment on your current consultation on short selling, and applaud your leadership in trying to establish appropriate and common short selling regimes around the world.
The Investor Relations Society in the UK represents members working for public companies to develop effective two way communication with the markets and create a level playing field for all investors. It has 600 members drawn both from the UK and overseas, including the majority of the FTSE 100 and much of the FTSE 250. The UK Society is also a member of the Global Investor Relations Network.
Introduction
We agree with the theme of your consultation that short selling is a legitimate activity which, among other benefits, provides liquidity in companies' issued shares and aids accurate price formation.
We also share your view that short selling is open to potential market abuse, which should be eliminated. An effective deterrent to this is disclosure. It is not our role to comment on the legal aspects of how to regulate enforcement actions, however, representing public companies in XXX we have strong views on disclosure, and its administration.
We believe that public companies and the wider market should have full and unrestricted access to information on who owns and can influence a company's shares - whether the positions are long or short. Unfortunately this is currently a very patchy process around the world, creating many anomalies. For example, UK companies know, through public disclosures, in great detail those US investors who own their shares, while US companies have much more out of date and restricted information on their US investors.
Thus your consultation looks to address an important area which has so far not been widely acted on.
Following the format of your ‘principles' we would like to comment as follows:
1. First Principle. "Short selling should be subject to appropriate controls to reduce or minimise the potential risks that could affect the orderly and efficient functioning and stability of financial markets. "
As noted above, our members believe that short selling plays a useful role in relation to companies' shares. Consequently we support the creation of an appropriate regime, with appropriate disclosure, that supports it.
2. Second Principle
" Short selling should be subject to a reporting regime that provides timely information to the market or to the authorities."
We agree with this, and with the underlying purpose of achieving orderly markets, free of market abuse. However we believe that companies should be able to know who owns or can influence their shares. We note that there are significant differences in the current disclosure regimes applicable to long positions, which should also be addressed. The break out box describes briefly the system of proactive identification available in some countries and not others, which does not provide for a level playing field for companies.
Further we note that this system of proactive disclosure does not currently extend to synthetic ownership, in the form of Contracts for Difference, equity swaps, and other derivatives.
We would encourage IOSCO to take the disclosure long positions into account, when considering those of short positions.
Your consultation also seeks feedback on specific issues:
a) Equity shares and derivatives.
Our members believe that derivatives play such an important function in the markets that to exclude them from short position reporting would remove much of the benefit of a disclosure regime on short positions. We also note that Hong Kong has successfully introduced a short selling disclosure regime, including disclosure of derivative positions.
b) Net or gross position reporting.
IOSCO should encourage regulators to establish disclosure on the basis of net positions. This avoids the risk of potential double counting of positions.
c) Frequency of reporting.
We believe that daily, end of day, reporting provides the maximum benefit without incurring substantial systems costs for reporters. The issue of an appropriate threshold is difficult, and needs to consider a number of issues, almost all at a national level. These include the existing transparency arrangements for long positions, whether a proactive right to establish ownership exists in the country, and the scale of short selling in each regime.
d) The responsibility for reporting. We agree with your view that only the investor has a sufficient overview of all positions that allow for accurate reporting.
e) Flagging of short sales. Flagging of short sales is useful additional information, and as such should be required by national regulators. However it is not a substitute for positional reporting.
3. Third Principle. "Short selling be subject to an effective compliance and enforcement system."
It is not part of our role to comment on enforcement by multiple regulatory agencies.
4. Fourth Principle. "Short selling regulation should allow appropriate exceptions for certain types of transactions for efficient market functioning and development. "
Given the fast pace of market structure development, we believe there is considerable risk in trying to identify and define activities which should be excluded from reporting. We would prefer to see each exclusion considered on a case by case basis.
Yours sincerely,
Michael Mitchell
General Manager
The Investor Relations Society
Proactive disclosure:
In some countries, including UK, Australia, South Africa, France and most recently Germany, public companies have access to the provisions of company law, which allow them to require disclosure of the beneficial ownership of their shares.
In practice, a company would examine its shareholders' register, and note that a holding was identified in a street name or nominee. The company can then write to that nominee, requiring that the underlying, beneficial, holder be identified.
Refusal allows the company to apply to the courts for sanctions, including withholding of dividends, removal of the vote, and ultimately the disenfranchisement of the share entirely. Because this is now a well established procedure, in practice these sanctions are rarely needed.
For their part, companies are obliged to create an index of responses, and to allow inspection of that index.
The result is that companies registered in those countries have much greater visibility of their shareholders than in others, creating an imbalance in how companies can proceed.
Published: 7 May, 2009