In just about his first public utterance as chief executive of Hong Kong's Securities and Futures Commission (SFC), Ashley Alder sought to calm fears that dramatic declines in the city's Hang Seng Index had been caused by short-selling.

Alder, who was officially installed in his new capacity at the start of this month, pointed out that stock markets worldwide had seen serious market declines and extreme volatility in recent months amid an uncertain global economic outlook and a continuing eurozone sovereign debt crisis.

At the same time he stressed that the SFC would not hesitate to take immediate action to deter any manipulative or abusive short-selling practices. 

He also offered a reminder that the SFC would shortly be introducing legislation to implement a short position reporting regime to enhance the transparency of short-selling activities.

"Short-selling is a trading and hedging tool commonly and legitimately used by a range of market participants," said Alder. "It is not unusual to see the level of short-selling increase significantly in the market environment we have been experiencing in recent months.

"Extreme volatility has reflected global concerns centred on an evolving financial crisis which started three years ago, and which has now centred on sovereigns and exposed banks, particularly in the eurozone."

With respect to the Hong Kong market rally last week -- the Hang Seng surged 9% from the end of trading on October 4 to close at 17, 707 points on October 7 -- he noted that markets were especially sentiment-driven at the present time.

"We can see this from the market rebound following reports of greater political resolve in Europe to address the debt crisis, and news of further market stimulus by the Bank of England and the extension of unlimited liquidity by the European Central Bank to eurozone banks."

Alder also sought to press home the point that Hong Kong already has a robust short-selling regime that is more stringent than most overseas markets.

As a statutory requirement, short-selling is only permitted in Hong Kong if it is covered -- that is, at the time of the sale the seller must have borrowed the stock or obtained a confirmation from the lender that he has the stock available to lend to the seller.

The seller and his/her broker are required to confirm that the short-selling orders were covered before executing the transaction, and short-selling orders must be flagged when submitting to the Hong Kong stock exchange for execution.