Gay Huey Evans, Director of Markets and Exchanges at the Financial Services Authority said, "The consultation confirmed our view that there was no need to impose additional controls on short selling but that greater transparency would be valuable. We therefore welcome CRESTCo's initiative to publish securities lending data. This proposal meets all the criteria we set out in our consultation."
Respondents did acknowledge that this data is not a perfect proxy for short selling but nevertheless provided helpful information. The general view was that the costs and operational difficulties involved in some of the other options canvassed in the discussion paper outweighed the usefulness of the information they would yield.
The FSA has also been working with CRESTCo and the equity exchanges to address potential settlement problems which can occasionally arise from the short selling of illiquid stocks. In such instances, sufficient securities may not be available either for lending or borrowing, resulting in the transaction not settling on the intended settlement date. Our focus has been on improving the information available to market users with the emphasis on a market based solution. In this regard:
- First, CRESTCo plans to publish regular data on settlement failures for those securities with the highest proportion of trades that do not settle in the expected timeframe. This will enable market participants to spot potential problems developing in particular stocks.
- Second, the London Stock Exchange and virt-x have agreed to notify their members of those securities subject to a significant proportion of settlement delays. We are discussing with the exchanges and relevant trade associations how customers seeking to trade in the securities in question can best be warned about possible settlement delays.
- Third, the London Stock Exchange will consider shortening the 'buy-in' timeframe for illiquid securities experiencing a significant build up in settlement delays. Both the Exchange and virt-x will also keep penalties for 'buy-in' under review.
Background
- The FSA issued DP17: Short selling in October 2002. Responses were requested by the end of January 2003.
- Short selling involves selling a security that you do not own. The seller may have already borrowed the necessary security on a temporary basis in order to deliver the stock to the buyer or may not hold them at all, the latter being referred to as a naked short. In all cases, the related security must be purchased at a later stage to close out the transaction.
- The FSA put forward three options for improving general transparency: reporting and publishing of short sales in the cash equity markets; reporting and publishing of short positions in both cash and derivatives markets; and publication of securities lending data. The Discussion Paper set out three tests for any proposal - the information would need to be useful, cost effective to supply and would need to respect commercial confidentiality.
- 'Buy-in' involves a member firm requesting that the Exchange 'buy-in' securities which the seller has not delivered in settlement of an on-Exchange transaction.
- CRESTCo Limited, part of Euroclear, operates the real-time settlement system for UK securities and Irish equities. Settlement performance in the UK is generally very good, with 99% of UK trades settling by the intended settlement date.
- The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; the appropriate degree of protection of consumers; and fighting financial crime.
- The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal
