Friday, October 2, 2009


The SEC held a Securities Lending and Short Sales Roundtable on September 29 - 30, 2009, at its headquarters in Washington, D.C. The purpose of the roundtable was to review securities lending practices and also analyze possible short sale pre-borrowing requirements and additional short sale disclosures.

Day one of the roundtable focused on securities lending. In SEC Chairman Mary L. Schapiro’s opening statement, she noted that as the global securities market and investing have expanded, so have short selling and related strategies. As a result, the demand for securities lending has also grown. Ms. Schapiro noted that the recent credit crisis revealed that securities lending was much riskier than most of the players had thought in the past. This was revealed particularly in cases where the cash collateral for borrowed securities was reinvested in programs which experienced unanticipated illiquidity and losses.

In order to address this issue, day one consisted of four panels. The first panel was an overview of the securities lending regime. The second panel discussed investor protections concerns, including cash collateral reinvestment and the problems created by the credit crisis and potential solutions. The third panel discussed whether there was sufficient “transparency” in the current securities lending marketplace, and whether steps needed to be taken to improve it. The final panel discussed the future of securities lending, and whether there were any regulatory gaps in the marketplace and a need for additional SEC action to enhance investor protection.

Day two of the roundtable focused on short selling issues. Ms. Schapiro stated that due to the strong opinions on short selling of both supporters and detractors, she has made it a priority to evaluate the issue of short selling regulation in her tenure as SEC chairman.

The second day roundtable discussions consisted of two panels. The first panel considered the merits of imposing a pre-borrow or “hard locate” requirement on short sellers, or alternative forms of such proposals to enhance their benefit to investors. The purpose of this discussion was to address the abusive “naked” short selling and fails to deliver and the manipulative effect this activity can have on the market. Ms. Schapiro noted that the discussion would take into account the Commission’s existing “locate” requirement under Regulation SHO, which required short sellers to borrow or at least have reasonable grounds to believe that the securities can be borrowed, and Rule 204, which requires that clearing firms immediately purchase or borrow securities to close out the fail to deliver position by no later than the beginning of regular trading hours on the settlement date following the day the participant incurred the fail to deliver position.

Ms. Schapiro announced that the second panel would consider additional means to foster short selling transparency so that investors and regulators could have more and meaningful information about short sale activity. The panel would consider what additional public or non-public disclosure of short selling transactions and short positions would be beneficial, and if so, what type of disclosure should be implemented.

Ms. Schapiro made clear in her day two opening statement that the purpose of these roundtable discussions is to ensure that forthcoming regulation in this area is the result of a deliberate and thoughtful process. This indicates that these discussions will likely lead to SEC policy changes in the future.

A complete copy of Ms. Schapiro's opening remarks on September 29 can be found here, and a copy of her opening remarks on September 30 can be found here.

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