.jpg)
The World Federation of Exchanges (WFE) submitted its response to a March 2009 Consultation Report on the regulation of short selling issued by a task force of the Technical Committee of the International Organization of Securities Commissions (IOSCO). The report, produced in response to emergency short selling bans implemented on many markets last September, is expected to be acted upon by IOSCO at its annual conference in June.
A full copy of the WFE’s response letter is attached. William J. Brodsky, Chairman of the Board of Directors of the WFE and Chairman and CEO of the Chicago Board Options Exchange (CBOE), signed the comment letter on behalf of WFE.
In its response, the WFE concurs with IOSCO that prohibitions against abusive short selling should be rigorously enforced, but that legitimate short selling plays an important role in the market in terms of providing more efficient price discovery, mitigating market bubbles, increasing market liquidity, facilitating hedging and other risk management activities. Further, WFE believes that to restore investor confidence it is important that regulators and governments are involved in dispelling myths about short selling and re-affirming the importance of short selling to the efficient and effective operations of markets.
WFE believes that short selling should be subject to principles-based regulations in order to maintain the efficient and effective operation of markets. WFE finds the principles espoused by IOSCO to be sound, and generally supports their adoption. In the attached comment letter, WFE specifically responded to the following four principles as set forth by IOSCO:
IOSCO Principle 1 – 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.
Principle 2 – Short selling should be subject to a reporting regime that provides timely information to the market or to market authorities.
Principle 3 – Short selling should be subject to an effective compliance and enforcement system.
Principle 4 – Short selling regulation should allow appropriate exceptions for certain types of transactions for efficient market functioning and development.
The WFE response also includes a final comment regarding securities lending practices: WFE would suggest that IOSCO pay even closer attention to practices involved in securities lending, as short selling and securities lending cannot be disassociated. Over this decade, this has become a very large and beneficial financial service; according to a research report commissioned by WFE, revenues associated with it in 2007 were estimated at U.S. $8 billion, which was very nearly equal to the trading revenues generated on WFE member exchanges.
WFE is the association of 51 regulated exchanges around the world. It develops and promotes standards in markets.
