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WFE Responds to IOSCO Report on Short Selling Regulation

WFE advocates principles-based regulatikons for short selling to maintain efficient and orderly markets.

The World Federation of Stock Exchanges (WFE) submitted a response to a report on regulation of short selling issued by a task force of the Technical Committee of the International Organization of Securities Commissions (IOSCO).

In the response, WFE concurs with IOSCO ‘s March 2009 Consultation Report that prohibitions against abusive short selling should be rigorously enforced, but that legitimate short selling plays an important role in the market in terms of providing more efficient price discovery, mitigating market bubbles, increasing market liquidity, facilitating hedging and other risk management activities. WFE also maintains, that to restore investor confidence it is important that regulators and governments are involved in dispelling the myths about short selling and re-affirming the importance of short selling to the efficient and effective operations of markets.

WFE said that short selling should be subject to principles-based regulation to maintain efficient and effective operations of markets, and it generally supports the adoption of principles put forth in the IOSCO report.

In responding to the four principles espoused by IOSCO, first, WFE said the first principle short selling should be subject to appropriate controls to reduce or minimize the potential risks that could affect the orderly and efficient functioning and stability of financial markets. Principle No. 2 is that short selling should be subject to a reporting regime that provides timely information to the market or to market authorities. Commenting on IOSCO’s third principle, WFE said short selling should be subject to an effective compliance and enforcement system. In terms of the fourth principle, WFE said that short selling regulation should allow appropriate exceptions for certain types of transactions to allow for efficient market functioning and development.

Finally, WFE suggested in its response letter, that IOSCO pay closer attention to practices in securities lending, as short selling and securities lending cannot be disassociated. According to a research report commissioned by WFE, revenues associated with securities lending in 2007 were estimated at $8 billion, which was nearly equal to the trading revenues generated on WFE member exchanges.

William Brodsky, chairman of the board of directors of the WFE, and chairman and CEO of the Chicago Board Options Exchange (CBOE), signed the WFE response letter. IOSCO is expected to act upon its March 2009 Consultation Report on short selling regulation at its annual conference in June. The report was produced in response to emergency short-selling bans implemented on many markets in September of 2008.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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