Hong Kong SFC Consults On Increasing Short Selling Transparency

by Mary Swire, Tax-News.com, Hong Kong

10 August 2009

Hong Kong's Securities and Futures Commission (SFC) has issued a consultation paper which aims to gather public input on increasing short position transparency.

Short selling, or taking a short position, is an investment technique whereby investors borrow an asset from another investor, sell the asset, and if the price falls, purchase it back at a lower price before returning it to the initial investor, thereby earning a profit.

However, the practice has been criticised for undermining market confidence in certain situations, and many governments are seeking to increase scrutiny in this area.

The consultation paper outlines the Commission's objectives, and seeks comments on further enhancing the transparency of short selling in Hong Kong, one of the four principles recommended in the report entitled “Regulation of Short Selling”, which was published by the International Organization of Securities Commissions’ (IOSCO) Technical Committee.

The IOSCO report recommended four high-level principles for the effective regulation of short selling, namely that:

• Short selling should be subject to appropriate controls to reduce or minimise the potential risks that could affect the orderly and efficient functioning and stability of financial markets;
• Short selling should be subject to a reporting regime that provides timely information to the market or to market authorities;
• Short selling should be subject to an effective compliance and enforcement system; and that
• Short selling regulation should allow appropriate exceptions for certain types of transactions for efficient market functioning and development.

The consultation paper lays down a number of approaches that may be taken with regard to the introduction of a new reporting regime, and the issues that will have to be considered and addressed in formulating relevant requirements.

Commenting on the publication of the consultation, on which comment is invited until September 30, the SFC explained that:

"Hong Kong’s current short selling regulatory framework is robust and embodies the four principles recommended in the report. In terms of transparency, short sales executed on the Stock Exchange of Hong Kong Limited must be flagged and aggregated covered short selling turnover is published daily."

"However, no information is available on the outstanding short position in the market at present. Increased transparency will facilitate a better understanding of the overall dynamics of short-selling activities in Hong Kong and will enable the SFC to better perform its regulatory functions."

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