On 9 January 2013, the Monetary Authority of Singapore (MAS) issued the Guidelines on Short Selling Disclosure (SFA 15-G02) (the Disclosure Guidelines), setting out its position on the disclosure of short selling trades and reminding market participants of their obligation to make true and accurate disclosure. This follows the announcement by the Singapore Exchange (SGX) on 8 January 2013 that the SGX will, amongst others, enable tagging of securities orders which involve short selling from March 2013 (New SGX Disclosure Requirements). The SGX will also publish daily reports on the total value and volume of short sales for each counter. These changes seek to improve transparency so as to enable investors to make better-informed decisions.
Short selling involves the sale of securities that the seller does not own at the time of placing the order. Short sellers sell on the belief that the price of the particular securities will fall, or are seeking to hedge against potential price volatility in securities that they own.
Disruptive short selling can result in increased market volatility and market disorder. Short selling practices once again came under scrutiny in Singapore after the recent incident involving US short-seller Muddy Waters LLC, which issued its research report setting out allegations against the accounting practices of Olam International Ltd.
Despite its potential pitfalls, regulators in many jurisdictions recognise the value of legitimate short sales and allow regulated short selling. In Singapore, the MAS recognises that legitimate short selling allows for more efficient price formation, increases market liquidity and facilitates risk management as well as the development of hedging activities.
Short Selling Disclosure in Singapore
The enhanced disclosure regime is in accordance with the international regulatory and risk management standards set by the International Organisation of Securities Commissions (IOSCO). The New SGX Disclosure Requirements follows from the public consultation conducted by the SGX in 2010.
As highlighted in the Disclosure Guidelines, the potential disruptive effects of short sales are mitigated in Singapore through the following mechanisms:
- to reduce disruptions in the settlement system caused by a failure of delivery relating to the short trades, the Central Depository (Pte) Limited (CDP) undertakes buying-in of securities on behalf of short sellers whose positions are not covered (i.e. who do not possess the securities for delivery) on the settlement date. The cost of the purchase and a penalty is imposed on the seller who fails to deliver. Where a Clearing Member fails to deliver securities by the end of the settlement date in accordance with the CDP Clearing Rules, the CDP may impose a fine of S$1,000 or 5% of the contract value of the undelivered securities (whichever is higher); and
- the Singapore Exchange Securities Trading Limited (SGX-ST) conducts surveillance to detect market abuse.
Pursuant to the Disclosure Guidelines and the New SGX Disclosure Requirements:
- market participants will be required to inform the relevant SGX-ST Trading Members on trades where part or the entire trade are short sales and the SGX-ST will, from March 2013, enable tagging of securities orders which involve short selling. Market participants are expected to split partial short orders into separate orders with short sale orders marked accordingly; and
- the SGX-ST will publish the aggregate short selling information through daily reports on the total value and volume of short sales for each counter.
There is potential criminal liability under the Securities and Futures Act for a person who, with the intent to deceive, makes or furnishes, or knowingly and wilfully authorises or permits the making or furnishing of, any false or misleading statement or report to a securities exchange, futures exchange, designated clearing house or any officers thereof relating to dealing in securities. On conviction, the person may be liable to a fine not exceeding S$50,000 or to an imprisonment for a term not exceeding 2 years or to both.
Impact on the Market
The Disclosure Guidelines and the New SGX Disclosure Requirements are expected to provide more information on short selling activities which may be relevant to the trading decisions of the market participants. Shareholders should however note that the information is not comprehensive, as information on short sale volumes do not reflect the outstanding short position in the securities, and volume of short sales may include trades which have since been squared off by offsetting buy trades.
It is also worth noting that the Singapore regime on disclosures does not go as far as the European Union Regulations. Under Regulation (EU) No.236/2012 (the EU Short Selling Regulation), which came into force on 1 November 2012, a public disclosure of net short positions of 0.5 per cent. (the Initial Public Disclosure Threshold) of issued share capital of a company admitted to trading on a trading venue is required. Further reporting obligations are triggered for each 0.1 per cent. increase or decrease in net short position above the Initial Public Disclosure Threshold, and when the net short position falls below the Initial Public Disclosure Threshold. Net short positions in shares must be notified to the relevant competent authority where they reach or fall below 0.2 per cent. of the issued share capital of a company, or each 0.1 per cent. increase or decrease above such threshold. While more onerous on traders, such notification and reporting requirements will likely provide a clearer picture of parties who may be accumulating short positions in any securities.
There nevertheless remains a question of whether the new disclosure regime set out in the Disclosure Guidelines and the New SGX Disclosure Requirements would clear the muddy waters sufficiently so as to significantly improve investors’ visibility on short sales.