Gay Huey Evans, FSA Director of Markets and Exchanges, said: "Short selling has recently been the subject of considerable comment and we thought it was timely to look again at the issues it raises. Today's discussion paper is designed to move the debate forward and is based on our discussions with a wide range of market participants.
"Our view remains that short selling is a legitimate investment activity which plays an important role in supporting efficient markets. We therefore see no case for any prohibition or restriction on short selling.
"But we do recognise that short sales contain information that may be relevant to many market users and, as such, increased transparency is desirable.
"There are a number of ways in which this could be achieved and we are seeking views on which option, or combination of options, would provide the market with the information it needs in the most cost-effective manner."
Options for change
The discussion paper seeks views on possible options for increasing transparency:
- Reporting and publishing of short sales in the cash equity market: This is the approach that is taken in the US and other jurisdictions and would include the reporting and publishing of aggregate naked and covered short sales in the cash equity market.
- Reporting and publishing of short positions in the cash and derivative markets: This option would require all short positions in the derivatives or cash equity market to be reported and would give a fuller picture of the extent of short positions.
- Reporting and publishing of 'naked' short sales: Some concern has been expressed about 'naked' short sales (where the short sale is not covered by the short seller borrowing stock) and the extent to which they can cause settlement disruption. Publication of naked shorts to the market might limit the amount of naked shorting.
- Securities lending as a proxy for short selling: Publication of securities lending data could be helpful in giving a picture of the pressure on supply of a particular stock and perhaps on the level of short selling occurring. It is, however, only a rough proxy for short selling and, in its raw form, involves double counting. As such there is a question mark over how useful the data would be. But, CRESTCo, which runs the UK securities settlement system, is currently working to produce more refined information and it is possible that certain high level data might be published for wider distribution. This option would not entail any additional reporting requirements.
The FSA is seeking respondents' views on the cost, commercial confidentiality, comprehensiveness, timeliness and usefulness of each of these options.
Next steps
Responses to the discussion paper are invited by end-January. Following consideration of those responses, the FSA will issue a feedback statement summarising the main points and indicating what further action it intends to take.
