The Japanese authorities continue to wage war on short selling. Today the Financial Services Agency (FSA) announced that Merrill Lynch Japan Securities Co., Ltd., KBC Financial Products UK Limited, Okasan Securities Co., Ltd. and Credit Suisse First Boston Securities (Japan) Ltd. had all violated laws designed to curb short-selling. The FSA has ordered all four firms to strengthen internal control systems; secure strict compliance by the directors and staff; take preventive measures against recurrence of the violations; clarify the ultimate locus of responsibility; penalise staff and their superiors who condone short-selling; and “work out concrete measures with a target date to root out short-selling in breach of the law.”
Influential hedge fund advisers LJH Global Investments LLC note in their March 2002 newsletter that the announcement in February of the new rules on short selling in Japan was causing concern among investors that the rules would inhibit hedge funds’ ability to sell stock short and so undo their strategies. In fact, says LJH, the ‘uptick’ rule only brings Japan in line with the United States, which everybody agrees has a vibrant short selling market.
The firm adds that the request for brokers to charge fees in excess of what is charged for nominal ‘long only’ sales is unlikely to be implemented due to commercial pressures. But it says the new reporting requirements could be an administrative burden to brokers that sell stock short. “As to whether the net effect of the changes will impact market liquidity, the consensus view from managers whom LJH has contacted is that this is unlikely to be the case,” the firm concludes. “One insurance company is rumored to have withdrawn from stock lending; however, the general view is that stock ownership in Japan is sufficiently broad (with considerable foreign ownership) and that this should not be an issue. In conclusion, LJH’ s view is that the new rules should not deter investments in Japanese hedge funds.”