IOSCO and AIMA Make Short-Selling Recommendations

Spokespeople from IOSCO and AIMA have released statements regarding how regulators could improve their regulation of the short-selling market
By None

Martin Wheatley, Chairman of the International Organization of Securities Commissions (IOSCO) Task Force on Short Selling, and Andrew Baker, Chief Executive of the Alternative Investment Management Association (AIMA), have both released statements regarding how regulators could improve their regulation of the short-selling market.

We believe that short selling should operate in a well structured regulatory framework in the interests of maintaining a fair, orderly and efficient market, said Wheatley. The objective of such regulation being to reduce the potential destabilizing effect that short selling can cause without exerting undue impact on its legitimate benefits in capital formation and volatility reduction.

While IOSCO encourages a concerted move towards a consistent approach to short selling, it recognises that the case for the regulation of this activity varies from jurisdiction to jurisdiction and depends on a range of domestic factors. These principles will provide guidance to market authorities and assist them in assessing and developing their short selling regulatory framework.

In a show of solidarity by AIMA, Baker released a statement supporting the move by IOSCO: We also agree that there should be appropriate reporting regimes for disclosing short positions to national regulators, although we believe that any reporting of short positions to the market should be in aggregate form only.

We support the Task Forces suggestion that regulators worldwide should have an effective discipline for the settlement of short selling transactions, particularly the settlement of failed trades. Indeed in our new policy platform of 24th February we said we would support measures to reduce such settlement failures.

The statements relate to an IOSCO consultation report entitled Regulation of Short Selling prepared by its Task Force on Short Selling, The Task Force was established by the Technical Committee in November 2008 in response to concerns regarding the impact short selling was having in the extreme market conditions created by the financial crisis.

The report recommends that effective regulation of short selling should be based on the following four principles:

1. Short selling activities should be subject to appropriate controls to reduce or minimize the potential risks that could affect the orderly and efficient functioning and stability of financial markets;2. Short selling should be subject to a reporting regime that provides timely information to the market or to market authorities;3. Short selling should be subject to an effective compliance and enforcement system; and4. Short selling regulation should allow appropriate exceptions for certain types of transactions for efficient market functioning and development.

The report can be found here.