Following the publication in June of IOSCO's report on the regulation of short selling, the SFC has commenced its Consultation on increasing short position transparency. The consultation paper (CP), published on 31 July 2009, addresses a recommendation in the IOSCO report that short selling "should be subject to a reporting regime that provides timely information to the market or to market authorities".
The SFC is supportive of legitimate short selling, and is not seeking to discourage it by the transparency initiative, but considers enhanced reporting has four main advantages including providing an early warning sign of a build-up of large short positions that may impact market stability. Throughout the CP, the SFC is mindful of the time and resources costs necessary for implementation and ongoing compliance of a new reporting regime and seeks a solution which is practical and proportionate.
The CP contemplates two alternative reporting systems: increased transactional reporting by the use of close-out indicators or the adoption of a short position reporting regime.
Views are sought on whether derivatives ought to be included in the reporting regime and, if so, whether it should be limited to single stock derivatives or also basket and index derivatives. If derivatives are to be included, the SFC states "we would like" the exposure to be calculated on a delta adjusted basis rather than a notional basis (as under the current disclosure of interests regime).
The SFC is of the view that responsibility for reporting short positions should rest with the holder of the positions. Whilst agents (e.g. brokers or custodians) may be permitted to report the information on behalf of holders, the holder will remain accountable for compliance and accuracy of reports. For funds, the reporting requirement will apply to each fund. The fund manager may report on behalf of the funds it manages but will not be able to aggregate positions across funds.
Whether the reported information should be shared with the public is an issue which the SFC notes is a contentious area. The SFC lists certain arguments against public disclosure, including that it may unfairly prejudice short sellers in the execution of the propriety trading strategies, but states "Public disclosure of the information would serve the purpose of providing additional transparency to the public."
The SFC seeks comments on the CP by 30 September 2009, following which draft legislation will be published for public consultation. The CP is available via the following link to the SFC website: http://www.sfc.hk/sfcConsultation/EN/sfcConsultFileServlet?name=incshtpostrans&type=1&docno=1