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The consultation report proposes common principles to help create a more consistent regulatory regime for short-selling, including a reporting regime to give markets timely information. “Short-selling should operate in a well- structured regulatory framework in the interests of maintaining a fair, orderly and efficient market”, IOSCO states. “The primary objective of such regulation would be to reduce the potential destabilising effect that short-selling”.
The report recommends four high-level principles:
1. Short-selling activities 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;
2. Short-selling should be subject to a reporting regime that provides timely information to the market or to market authorities;
3. Short-selling should be subject to an effective compliance and enforcement system; and
4. Short-selling regulation should allow appropriate exceptions for certain types of transactions for efficient market functioning and development.
The report furthermore outlines the minimum that regulators should do in order to support each of the four principles. To reduce or minimise the potential risks from short-selling, for example, regulators should have an effective discipline for the settlement of short-selling transactions. As a minimum requirement this should impose strict settlement (such as compulsory buy-in) of failed trades.
Deadline for comments is 4 May 2009.