The SEC adopted a new rule today to place restrictions on short selling when a stock is experiencing significant downward price pressure. The alternative uptick rule (Rule 201) is meant to limit short selling from further driving down the price of a stock that has dropped more than 10 percent in one day. It will enable long sellers to stand in the front of the line and sell their shares before any short sellers once the circuit breaker is triggered.
The rule imposes restrictions on short selling only when a stock has triggered a "circuit breaker" by experiencing a price decline of at least 10 percent in one day. After the triggering event, short selling would be permitted if the price of the security is above the current national best bid.
Rule 201 includes the following features:
Short Sale-Related Circuit Breaker: The circuit breaker would be triggered for a security any day in which the price declines by 10 percent or more from the prior day's closing price.
Duration of Price Test Restriction: Once the circuit breaker has been triggered, the alternative uptick rule would apply to short sale orders in that security for the remainder of the day as well as the following day.
Securities Covered by Price Test Restriction: The rule generally applies to all equity securities that are listed on a national securities exchange, whether traded on an exchange or in the over-the-counter market.
Implementation: The rule requires trading centers to establish, maintain, and enforce written policies and procedures that are reasonably designed to prevent the execution or display of a prohibited short sale.
Commissioner Luis Aguilar added the following commentary at the SEC Open Meeting held today:
"If every short sale were harmful, or every short sale benign, our task would be straightforward. There is a tension in regulating short sales. Efforts to reduce the potential for short sales to facilitate dangerous declines in securities prices, market manipulation, and diminished market confidence can conflict with efforts to permit short sales for hedging, improved liquidity, and price discovery. I believe that the rule before us today strikes a workable balance."
A copy of the SEC press release announcing adoption of the rule can be found here. Commissioner Aguilar's comments at the Open Meeting can be found here.
Showing posts with label Short-Selling. Show all posts
Showing posts with label Short-Selling. Show all posts
Wednesday, February 24, 2010
Friday, October 2, 2009
SEC WRAPS UP SECURITIES LENDING AND SHORT SALES ROUNDTABLE
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.
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.
Thursday, August 27, 2009
THE ALTERNATIVE UPTICK RULE GAINS STRENGTH
On August 17, 2009, the SEC announced that it has reopened the comment period for its proposed "Amendments to Regulation SHO" for 30 days to allow additional feedback on the alternative uptick rule, an alternative short selling price test that would allow short selling only at a price above the current national best bid.
In its original "Amendments to Regulation SHO," proposed April 2009 in Securities Exchange Act Release No. 59748, the SEC proposed two approaches to restrictions on short selling: the "short sell price test," which would apply on a market-wide and permanent basis; and the "circuit breaker," which would apply only to a particular security during a severe market decline in the price of that security. The SEC also sought comment on the alternative uptick rule in its April 2009 proposal, including whether it would be preferable to the "short sell price test," and whether it would be more effective as a market-wide permanent price test restriction or in conjunction with the "circuit breaker" approach.
The SEC received almost 4,000 comments to its April 2009 proposal, and there was some evidence of support for the alternative uptick rule. As such, to ensure that investors and industry professionals have a full opportunity to comment on the alternative uptick rule, the SEC has published a supplemental request for comment specifically on the rule.
Click here for the SEC's complete notice of re-opening of the comment period and its supplemental request for comment.
In its original "Amendments to Regulation SHO," proposed April 2009 in Securities Exchange Act Release No. 59748, the SEC proposed two approaches to restrictions on short selling: the "short sell price test," which would apply on a market-wide and permanent basis; and the "circuit breaker," which would apply only to a particular security during a severe market decline in the price of that security. The SEC also sought comment on the alternative uptick rule in its April 2009 proposal, including whether it would be preferable to the "short sell price test," and whether it would be more effective as a market-wide permanent price test restriction or in conjunction with the "circuit breaker" approach.
The SEC received almost 4,000 comments to its April 2009 proposal, and there was some evidence of support for the alternative uptick rule. As such, to ensure that investors and industry professionals have a full opportunity to comment on the alternative uptick rule, the SEC has published a supplemental request for comment specifically on the rule.
Click here for the SEC's complete notice of re-opening of the comment period and its supplemental request for comment.
Tuesday, August 4, 2009
NEW SEC SHORT-SALE RULES ALREADY IMPACTING MAJOR STOCK EXCHANGES
On July 31, 2009, we briefly discussed the SEC's decision to make permanent its temporary Rule 204T, which attempts to curb short-sale abuses by strengthening the close-out requirements of Regulation SHO for failures to deliver securities resulting from investor short-selling in the securities market. As we noted, since the SEC's adoption of temporary Rule 204T, there has been a significant decline in the number of "failures to deliver" resulting from short-selling.
A recent article by the Wall Street Journal indicates that the SEC's permanent enactment of Rule 204T is already having an impact on the nation's largest stock exchanges. Specifically, "[b]oth NYSE Euronext (NYX) and Nasdaq OMX Group Inc. (NDAQ) are now aggregating daily company-by-company short-sale data on all trades that take place on their exchanges." According to the article, Nasdaq plans to eventually seek SEC approval to charge for this information, a request which seems clearly inconsistent with the SEC's purpose behind Rule 204T.
Our attorneys have more than two decades of combined experience in the areas of securities regulation and securities fraud litigation.
Click here to read the entire Wall Street Journal article.
A recent article by the Wall Street Journal indicates that the SEC's permanent enactment of Rule 204T is already having an impact on the nation's largest stock exchanges. Specifically, "[b]oth NYSE Euronext (NYX) and Nasdaq OMX Group Inc. (NDAQ) are now aggregating daily company-by-company short-sale data on all trades that take place on their exchanges." According to the article, Nasdaq plans to eventually seek SEC approval to charge for this information, a request which seems clearly inconsistent with the SEC's purpose behind Rule 204T.
Our attorneys have more than two decades of combined experience in the areas of securities regulation and securities fraud litigation.
Click here to read the entire Wall Street Journal article.
Friday, July 31, 2009
SHORT-SELLING GETS A LONG-TERM OVERHAUL
In an effort to curb abusive short sales and provide public investors with greater disclosure, the SEC made permanent the amendments contained within Interim Final Temporary Rule 204T of Regulation SHO. The temporary rule, enacted in 2008, was originally set to expire on July 31, 2009. However, due to the documented success of Rule 204T, the SEC decided to adopt the rule long-term with some minor modifications.
Short selling is a form of advanced trading whereby a trader essentially bets on the failure, at least in the short-term, of a company. In a typical scenario, an investor sells borrowed securities to a particular buyer for full ownership, with the intent to buy back equivalent shares once the price has declined. The seller then returns the equivalent shares to the lender, thus satisfying any obligations to the lender and profiting from the decline in share price.
In a second and more problematic scenario, an investor sells securities to a particular buyer without having first arranged to borrow the shares which the investor sold. In essence, the investor sells securities in which he or she has no rights with the hope that the investor will then be able to purchase equivalent securities at a diminished price prior to the clearing time period at which delivery to the buyer must be made. This type of trading is commonly known as “naked” short-selling.
Abusive short-selling, and particularly naked short-selling, has been of particular concern to the SEC in that the practice often results in a “failure to deliver,” whereby an investor is unable to deliver the shares he or she has borrowed or sold within the specified time frame. A “failure to deliver” can create a misleading impression of the market for investors, and can have the effect of depriving rightful shareholders of the benefits of ownership.
As such, in 2005 the SEC enacted Regulation SHO, which targets abusive “naked” short-selling by attempting to reduce failures to deliver. Rule 204T, adopted on a temporary basis in October 2008, strengthens the close-out requirements of Regulation SHO for failures to deliver securities resulting from investor short-selling in the securities market. The SEC’s permanent enactment of Rule 204T provides strong evidence of the SEC’s determination to tackle the problems associated with abusive short-selling.
Short selling is a form of advanced trading whereby a trader essentially bets on the failure, at least in the short-term, of a company. In a typical scenario, an investor sells borrowed securities to a particular buyer for full ownership, with the intent to buy back equivalent shares once the price has declined. The seller then returns the equivalent shares to the lender, thus satisfying any obligations to the lender and profiting from the decline in share price.
In a second and more problematic scenario, an investor sells securities to a particular buyer without having first arranged to borrow the shares which the investor sold. In essence, the investor sells securities in which he or she has no rights with the hope that the investor will then be able to purchase equivalent securities at a diminished price prior to the clearing time period at which delivery to the buyer must be made. This type of trading is commonly known as “naked” short-selling.
Abusive short-selling, and particularly naked short-selling, has been of particular concern to the SEC in that the practice often results in a “failure to deliver,” whereby an investor is unable to deliver the shares he or she has borrowed or sold within the specified time frame. A “failure to deliver” can create a misleading impression of the market for investors, and can have the effect of depriving rightful shareholders of the benefits of ownership.
As such, in 2005 the SEC enacted Regulation SHO, which targets abusive “naked” short-selling by attempting to reduce failures to deliver. Rule 204T, adopted on a temporary basis in October 2008, strengthens the close-out requirements of Regulation SHO for failures to deliver securities resulting from investor short-selling in the securities market. The SEC’s permanent enactment of Rule 204T provides strong evidence of the SEC’s determination to tackle the problems associated with abusive short-selling.
Subscribe to:
Posts (Atom)