The Taiwanese regulator has restricted short selling activity by placing a cap on the daily maximum short selling of borrowed stocks to 20% of the average transaction volume of the past 30 trading days, from a 3% cap of outstanding shares per stock, according to a report by Bloomberg.
The news service reported that the countrys Financial Supervisory Commission (FSC) contacted insurers to urge them to stop short selling, seeking to bolster equities after the benchmark Taiex Index slumped the most among Asian benchmark gauges this year as the eurozone debt crisis threatens global economic recovery. FSC spokeswoman Lee Jih-Chu said these companies were reminded that short selling may result in the reduction of value of their own stocks, said the report, but denied a report in the local Commercial Times newspaper that the regulator had banned four state funds and insurers from securities lending.
Bloomberg reported that this month Taiwans Taiex index lost 11%, while the MSCI Emerging Markets Index sank 12%. The Taiex index lost 1.1% just before noon local time Friday, November 25, set for the lowest close since August 27 2009.
According to Bloomberg data, overseas investors sold $10.5 billion Taiwan stocks this year as of Thursday.
Regulatory pressure on short selling has intensified as regulators seek to limit profiteering on the back of the eurozone crisis in a bid to curb volatility. Spain and Italy extended their bans from August, according to reports. EU lawmakers in mid-October backed legislation that would impose tougher rules on short selling and trading in credit default swaps (CDS). The rules impose greater transparency and ban naked CDS trading (purchasing default insurance contracts without owning the related bonds), making speculation on a countrys default more difficult. However, while not imposing a full ban on naked CDS trading, the lawmakers agreed an exception of an option for a national authority to lift the ban temporarily in cases where its sovereign debt market is no longer functioning properly.
Austrian regulators this week extended naked short selling bans on the shares of four companies, Erste Bank, Raiffeisen Bank, UNIQUA, Vienna Insurance Group, regarded as system critical health to the countrys financial health. The ban, limited to November 30 has been extended to May 31 2012. The Austrian market is one of the first to prepare itself to handle that risk of naked short selling. Naked short selling is however allowed in specific situations, if these transactions are necessary in order for exchange members to fulfill their contractual obligations of entering binding bid and ask prices into the system and where short selling serves to secure already existing positions.
Industry professionals have questioned whether these regulatory measures are the right approach. Writing in a blog titled Taipei Short Selling Restrictions, Roy Zimmerhansl of Zimmerhansl Consulting Services, says: While I have sympathy with regulators that feel the need to do something to protect their markets (or at least to be seen to be doing something), artificial restrictions on trading are seldom the answer.
I have written before that regulators that have not repeated the mistakes of the 2008/2009 short selling bans should be given credit for not falling into the populist trap of reimposing the restrictions. Yet a minority of regulators have done it again.
In an October interview with Global Custodian about the EU short selling rules, Richard Metcalfe, head of global policy and a senior regulatory adviser at the International Swaps and Derivatives Association, said: Given that the crisis was about excessive debt, the measures that stop the market expressing views on that are nothing but a case of shoot the messenger. That doesnt help. Credit derivatives have existed for many entities sovereign and corporate for a long time without any problems. Moreover, CDS are useful for hedging exposures other than bonds. Short selling measures are therefore about hiding from the wider issues and are a way of shooting the messenger.
(JDC)