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Andrew Baker (pictured), CEO, AIMA gives a cautious welcome to CESR’s proposals for a pan-European short-selling disclosure regime.

“The Alternative Investment Management Association, the global hedge fund industry association, believes that short-selling is a wholly legitimate market practice, is not abusive and helps capital markets function more effectively. We welcome the recognition by the Committee of European Securities Regulators (CESR) that ‘legitimate short selling plays an important role in financial markets. It contributes to efficient price discovery, increases market liquidity, facilitates hedging and other risk management activities and can possibly help mitigate market bubbles’. We also agree with CESR that consistent rules for short-selling throughout the European Union are desirable.
 
CESR’s proposed reporting regime is greatly preferable to the bans that were imposed (and then lifted) on short selling. However we think it could be improved in several respects. We note that CESR says that ‘public individual position disclosure should be a central plank of the regime’ but we believe that any reporting of short positions to the market should be in aggregate form only. Aggregate reporting would provide useful information for regulators about short interest in individual stocks but this has not been proposed by CESR. We believe that disclosure of individual positions should be made privately to the regulator and kept confidential in order to prevent potentially serious market distortions for no obvious benefit.
 
CESR has set the threshold for reporting requirements too low at 0.2% of the issued share capital of the relevant stock for disclosures to regulators and 0.5% for disclosures to the market. This increases the likelihood that the information gathered will be overly burdensome on hedge fund managers and could swamp regulators with unnecessary information.
 
We would also note the recent report from the international management consultancy Oliver Wyman commissioned by the MFA that concluded that the UK rules requiring public disclosure of short positions came at the expense of wider spreads and poorer liquidity in those stocks affected.

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