European securities committee recommends short selling disclosure regime
Earlier this month, the Committee of European Securities Regulators (CESR) released a report recommending a pan-European short selling disclosure regime. While acknowledging that legitimate short selling plays an important role in financial markets by contributing to efficient price discovery, increasing market liquidity and facilitating hedging and other risk management activities, the report also cites concerns that it can be used in an abusive fashion. Specifically, short selling can drive down the price of financial instruments to a distorted level, contribute to disorderly markets and, especially in extreme market conditions, otherwise have an adverse impact on financial stability. In the interests of enhanced transparency about short selling activity, the objective in developing the disclosure model proposed by the disclosure requirement is to reduce or mitigate the negative consequences and risks of short selling without having an undue adverse impact on the benefits which the practice brings to markets.
The report proposes a two tier disclosure system whereby a short position reaching a specified initial threshold (0.2% of a company's issued share capital) would need to be disclosed to the relevant regulator. Incremental changes of short position of 0.1% would require further notification to the regulator, while a second threshold (0.5%) would also trigger a public disclosure requirement.
