Howard Davies, FSA Chairman, said in his opening remarks: "The practice of short selling has been the subject of much debate this summer. This is despite the fact that many market participants tell us they believe there is actually less overall short selling in this bear cycle than there had been in the recent bull cycle. Not surprisingly, people tend to be much more concerned about short selling in a bear market.
"The aim of today's roundtable is to take some of the heat out of this debate by giving all sides the opportunity to set out their views. The FSA views short selling just like any other investment activity and not as an abusive activity unless used as part of an abusive strategy. And as I have said before, we have not so far seen a persuasive case for restrictions, or a prohibition, on short selling.
"But we are sympathetic to increasing the amount of information that is available to the market on the level of short selling, or at least of securities lending. Today's roundtable is a useful forum for discussing possibilities before we publish our discussion paper this Autumn.
"Inevitably, in any discussion of disclosure options there is a trade off between comprehensiveness, accuracy and cost. What we need to find is a measure that meets the UK market's need for a cost-efficient disclosure of short selling, or its nearest proxy."
Options for disclosure
Possible options for increased disclosure that were discussed at today's meeting included:
- Crest stock borrowing figures, or some more refined data, could be published as the closest proxy for short selling. The Crest stock borrowing figures are a readily available source of information but, at least in their raw form, are only a rough proxy for short selling activity. This option would only address the cash market.
- All short sales in the cash equity market could be marked and information disclosed to the market. This option has been pursued in other jurisdictions such as in the US and Hong Kong. However, it may capture only a limited picture of short selling in UK circumstances and might have the effect of displacing short selling activity into other instruments.
- Short sales in any instrument (which could include exchange-traded and over-the-counter derivatives) could be disclosed to the market. This would deliver a comprehensive picture of short selling activity but the information is likely to be difficult and very expensive to collect for firms on an aggregated basis.
Key points from the roundtable
- All agreed that short selling was an issue that has generated a lot of interest over previous months and that was worthy of further debate.
- No one spoke out in favour of either a ban, or restrictions, on short selling and the general view was that short selling deepens, and therefore improves the liquidity of, UK markets.
- There was a wide-ranging discussion of the possible options for disclosure. A number of participants felt strongly that there did need to be increased transparency of short selling. But there was a clear message that the FSA and market participants need to establish who the disclosure is for, and what information would be useful, before the different options can be considered properly.
