REGULATION OF SHORT SELLING Final Report TECHNICAL COMMITTEE OF THE INTERNATIONAL ORGANIZATION OF SECURITIES COMMISSIONS June 2009 2 FINAL REPORT ON REGULATION OF SHORT SELLING 1. Executive Summary ..................................................................................................... 4 2. Objectives and Scope of this Report........................................................................... 5 3. The Regulatory Approach towards Short Selling – The Four Principles............... 6 The Four Principles Definition of Short Selling a. The 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 ................. 7 Regulatory tools used to control short selling activity Settlement discipline b. The Second Principle: Short selling should be subject to a reporting regime that provides timely information to the market or to market authorities ............................................................................................................. 10 Summary of the Conclusions of the 2003 Report on Transparency of Short Selling Objectives of reporting of short selling Short Positions Reporting Equity shares/derivatives Net or gross positions reporting The trigger level of reporting, and frequency of reporting Timing of reporting The constituents responsible for reporting Flagging of Short Sales 3 c. The Third Principle: Short selling should be subject to an effective compliance and enforcement system .................................................................. 16 Enforcement and compliance Monitoring and surveillance Cross-border enforcement cooperation d. The Fourth Principle: Short selling regulation should allow appropriate exceptions for certain types of transactions for efficient market functioning and development .............................................................................. 18 Appendix I: Members of the Task Force on Short Selling ............................................. 20 Appendix II: Regulatory Concerns Relating to Short Selling ........................................ 21 Appendix III: What is ‘short selling’? ................................................................................ 23 Appendix IV: Summary Table of Short Selling ‘’Reporting Requirements ................... 24 4 1. Executive Summary 1.1 In view of the recent financial crisis, the Technical Committee set up the Task Force on Short Selling (Task Force)1 to work to eliminate gaps in various regulatory approaches to naked short selling, including delivery requirements and disclosure of short positions. In this connection, the Task Force also examines how to minimize adverse impacts on legitimate securities lending, hedging and other types of transactions that are critical to capital formation and to reducing market volatility. 1.2 The mandate of the Task Force is to develop high-level principles for the effective regulation of short selling. These principles are designed to assist regulators in their consideration of a regulatory regime for short selling. This international initiative is an important global response which may help restore and maintain investor confidence under the current financial crisis, as the principles are formulated with a view to addressing the objectives of investor protection, helping to ensure that markets are fair, efficient and transparent, and reducing systemic risk. 1.3 The Technical Committee believes that short selling plays an important role in the market for a variety of reasons, such as providing more efficient price discovery, mitigating market bubbles, increasing market liquidity, facilitating hedging and other risk management activities. However, there is also a general concern that especially in extreme market conditions, certain types of short selling, or the use of short selling in combination with certain abusive strategies, may contribute to disorderly markets. 1.4 The Technical Committee recommends that effective regulation of short selling comprises the following four principles: a) 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. b) Short selling should be subject to a reporting regime that provides timely information to the market or to market authorities2. c) Short selling should be subject to an effective compliance and enforcement system. d) Short selling regulation should allow appropriate exceptions for certain types of transactions for efficient market functioning and development. 1 Appendix I contains the list of th