SECURITIES FINANCE

Naked Shorts May Be Banned, SEC Official Tells FT

The Securities and Exchange Commission (SEC) is expected to impose a tough new regulatory regime on short selling in the United States, the Financial Times reported today. The newspaper says SEC officials will present the proposals to their new chairman,

The Securities and Exchange Commission (SEC) is expected to impose a tough new regulatory regime on short-selling in the United States, the Financial Times reported today. The newspaper says SEC officials will present the proposals to their new chairman, William Donaldson, next week. "The time has come to address what to do about short-selling but it is going to be political, controversial and complex," an SEC official told the Financial Times.

The new rules are expected to oblige short-sellers to borrow stock to cover their position, eliminating naked shorts. However, the report suggests that this limitation will be applied to smaller and less liquid stocks only. At the moment, US traders are in any case prevented from shorting NYSE-listed stocks when a price is falling by the uptick rule, though no such restriction applies to NASDAQ-listed stocks.

The SEC probe into short-selling follows similar moves by the Japanese and UK regulators to either curtail the practice, or improve disclosure. Issuers have complained that short sellers manipulate their stock prices in a downward direction, while some institutional investors have also argued that short selling has exacerbated the decline in equity markets.