While regretting the extension by the Securities and Exchange Commission of its temporary ban on the short selling of financial stocks, hedge fund industry body the Managed Funds Associati
While regretting the extension by the Securities and Exchange Commission of its temporary ban on the short selling of financial stocks, hedge fund industry body the Managed Funds Association has praised the US regulator for backtracking on the requirement for market participants to disclose their short positions publicly.
‘The MFA commends the commission for modifying its emergency orders banning short selling and requiring public disclosure of short positions,’ says the association’s president and chief executive, Richard H. Baker. ‘To its credit, the commission recognised that these hastily-crafted rules have adversely affected market activity by increasing volatility, reducing liquidity and impairing the formation of capital.
‘While we remain opposed to the imposition of the short sale ban, and its extension, we are heartened that the agency has affirmed its temporary nature. In the interim, the MFA continues to urge the commission to amend the order to include an exemption for bona fide hedging transactions.’
According to Baker, public disclosure of short positions would have led market participants to reduce their trading, liquidate their portfolios to prevent being squeezed, and unwind positions to keep competitors from potentially re-engineering their strategies.
‘Such action would have exacerbated, not diminished, market instability, and runs contrary to the Commission’s stated goal of imposing these rules in order to promote market stability,’ he says.
Earlier the MFA had written to the SEC in a plea to let the emergency orders barring short selling of financial stocks and requiring the public disclosure of other short positions to expire on schedule at midnight on Thursday.
‘The MFA shares the commission’s deep concerns about the crisis in the global financial markets and strongly supports efforts to prevent, detect and punish manipulative conduct,’ Baker says.
‘As witnessed this past week, however, the orders have not prevented price declines of financial institutions, volatility in the securities of these firms, or the failure of a financial institution. We believe the orders may have run counter to their intended objectives by exacerbating fluctuations in the affected securities’ prices and disrupting the functioning of fair, orderly markets.’
Following the SEC’s acceptance of its request that disclosure of short positions should not be public, the MFA is continuing to ask the regulator to amend the prohibition order to include an exemption for bona fide hedging transactions and a materiality standard to determine whether a company is a ‘financial firm’ for purposes of the order.
In its letter, the association cites examples of the unintended negative consequences that have arisen for hedge funds and harmed investors including non-profit organisations such as pensions schemes, endowments and foundations. It urges the commission to consider implementing triggers to reduce volatile price swings in the trading of individual securities as a means of meeting its concerns over sudden and unexplained price movements.
The Managed Funds Association, whose members include hedge fund, fund of funds and managed futures fund management professionals, was established in 1991 as a source of information for policymakers and the media as well as an advocate for sound business practices and industry growth. The MFA is headquartered in Washington, DC, with an office in New York.
