Brokers Worried By Proposal On Short Selling

Sydney Morning Herald

Saturday May 24, 2008

Stuart Washington

SERIOUS doubts have been raised about the ability of regulators to impose effective disclosure of short selling.

Former regulators and big brokers yesterday expressed disquiet at the likely disclosure regime, describing the resulting information as almost meaningless.

Short selling, when investors profit from share price falls, is the subject of proposed laws to address uncertainty about the need to disclose short selling.

The regulatory manager for the Australian Securities Exchange, Malcolm Starr, said yesterday that at present disclosure of short selling captured much less than 1 per cent of total short-selling volumes.

Short selling by big fund managers, including hedge funds, has been blamed for sharp share price falls in companies such as Allco Finance Group, ABC Learning Centres and MFS, now Octaviar.

But at a Securities and Derivatives Industry Association conference in Melbourne yesterday, Alan Cameron, a former head of the Australian Securities Commission, raised three potential problems with the planned disclosure:

* Disclosure of short selling would be incomplete because there are other traded products, including options and contracts for difference, that can be used to the same effect as short selling.

* Brokers do not know what their institutional client is doing.

* Large amounts of disclosure may result in almost meaningless information.

A former head of market supervision at the Australian Stock Exchange, Jim Berry, called for disclosure to be extended to stock lending and derivatives contracts that could be used for short selling.

"What I think is needed is for people to know what supply of the stock is there, it's a proxy for what's going on," he said.

Grahame Pratt, the head of equities at ABN Amro, agreed that brokers relied on what their clients told them in relation to short selling.

"It's unenforceable, in a sense, because you need to get your client - assuming you are on the phone to him - to actually tell you."

He said moving disclosure responsibilities from brokers to stock lenders would give a meaningful proxy for the level of short selling.

But the chief executive of stockbroker Instinet, John Fildes, said international funds would not disclose their stock lending. "It's just impossible to enforce that kind of reporting," he said.

Mr Starr contrasted the difference in views among brokers, who generally labelled the new disclosures as meaningless, and investors, who welcomed steps towards more disclosure.