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This is in contrast to the United Kingdom and the United States, and latterly Australia, which have banned all shorting activities related to troubled financial stocks ¼ a measure that seems to now be continuously creeping to other stocks, forcing those regulators to pick and choose which companies are protected.
Their actions were followed by some Asian jurisdictions. Taiwan was the first to curb short selling, when on September 21 its Financial Supervisory Commission decreed the shares of 150 companies in key indices barred from short selling, if their price traded below the previous dayÆs close. The measure is effective until 3 October, when it will be reviewed.
The end of last week saw South KoreaÆs Financial Supervisory Service release similar measures. According to law firm Herbert Smith, regulators in Indonesia will announce restrictions shortly. China and Malaysia do not at present allow shorts.
Singapore, home to many hedge funds, says it will not prohibit short selling, but the stock exchange is tightening rules to discourage ænakedÆ short selling (when the fund manager does not borrow the shares it is selling short). Herbert Smith explains that, as of last Thursday, September 25, traders who cannot deliver shares sold will be subject to a penalty of 5% of the failed trade as well as an administrative fine. And traders who fail to deliver shares in the æbuying-inÆ market are liable to a penalty of S$50,000 and possible disbarment from the æbuying-inÆ market. Furthermore, for the next month, the exchange will publish a list of all bought-in securities, to enhance transparency.
Hong KongÆs SFC said on Friday, the 26th, that for now it will not ban short selling, although it retains the right to change its mind if conditions warrant. æNakedÆ shorting has never been allowed, while only liquid designated stocks are eligible for æcoveredÆ shorting (with a paper trail required of brokers or trading agents, to ensure the seller has borrowed the stock in question). There is also a ætick ruleÆ that requires any short sales trade at a price not less than the best current ask price bought-in.
The SFC had been planning, in conjunction with Hong Kong Exchanges and Clearing (HKEx), to scrap the tick rule, but has now decided to leave it in place. The tick rule and its disclosure rules for covered short sales make Hong KongÆs regulations more stringent than the laissez-faire approach previously taken in America and Britain.
It may revisit the issue at a time when global markets are deemed stable. It has proposed, however, that HKEx double its fee for failed trades.
ôThe current system in Hong Kong is robust and has proven itself to work well over the last 10 years,ö says SFCÆs CEO, Martin Wheatley. ôIf, however, we consider Hong Kong has become a target for abusive short selling strategies, we will act quickly and firmly, to protect the integrity of the market.ö
One reason for the SFC to hold steady is that the territory hasnÆt been subjected to the waves of shorting against financial institutions seen in the US and UK. The SFC says that between September 22 and 25, Hong KongÆs market short-selling turnover was in line with historic trends. Average daily short-selling turnover amounted to $4.7 billion during that week, or 7% of market turnover û less than experienced during the second and third quarters this year.
This leaves Hong Kong among just a trio of Asian jurisdictions that have not seen a need to amend their shorting rules (provided they allowed it in the first place). Thailand also prohibits ænakedÆ short sales, but has left covered sales be.
Japan is the major jurisdiction that has also left its shorting rules intact. Again, its rules were already strict, with no naked sales allowed, and no short selling where prices were lower than the latest market price announced by the relevant stock exchange, notes Herbert Smith.
Although Japanese authorities have also warned they will ban shorting if necessary, they want to avoid over-regulation. Takafumi Sato, commissioner of the Financial Services Authority, said on September 18: ôMy aim is to keep financial regulations as market-friendly and innovation-friendly as possible.ö He pledged to keep the FSAÆs æbetter market initiativeÆ on track, despite market volatility and the troubles of the worldÆs financial sector.
Although subprime issues have hurt the Japanese financial system, particularly in the supply of credit, most Japanese institutions now boast strong balance sheets, having fully recovered from the nationÆs post-1988 bubble ælost decadeÆ, and are now on the warpath to acquire cheap financial assets from the West.
Indeed, the Japanese see the current crisis as their chance to catch up with the West and finally bury the horrible memories of the 1990s and early 2000s.
ôFor many years after the early 1990s, JapanÆs financial sector was overwhelmed by the collapse of the bubble economy and the non-performing loan problem,ö Sato says. ôDuring that period, Japan found itself left behind as international competition intensified among financial centres. However, those years of difficulty are now over for JapanÆs financial sector, and we have entered a new stage. Now is an excellent time for Japan to close the gap with the global frontrunners.ö
He says that, although re-regulation is now the trend in the West, Japan is not mortally threatened by the credit crunch, and needs to implement its market-opening initiatives, and to take advantage of the growth potential among AsiaÆs real economies. The FSA wants to position Tokyo as a financial centre to take advantage of such opportunities.
The pragmatic stance of regulators in places such as Hong Kong and Japan make for a telling contrast to the actions unfolding in the US, UK and elsewhere.
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