EU short position disclosure wouldn't work: Study

01 February 2011 -- An EU proposal for the public disclosure of the net short positions of individual managers risks distorting financial markets and is not effective in meeting the needs of companies wishing to raise capital, investors seeking efficient risk management or regulators addressing financial stability, according to an independent study.

The report by Oliver Wyman, the international management consulting firm, was commissioned by the Alternative Investment Management Association (AIMA), the global hedge fund association, and sponsored by Deutsche Bank.

The new study seeks to update the findings from a 2010 report by Oliver Wyman* and to analyse the impact of a public disclosure requirement for short selling on trading activity in equity markets.

It comes as European lawmakers continue to consider changes to the European Commission’s draft short-selling regulations, which proposes public disclosure of individual managers’ net short positions above 0.5% of outstanding share capital. Under the existing timetable, a vote by the European Parliament’s Economic and Monetary Affairs Committee on possible amendments to the Commission’s original draft regulations could take place on 14 February 2011.

The Oliver Wyman study concludes that a regulatory regime based on the disclosure of individual managers’ net short positions above a threshold of 0.5% of outstanding share capital “is not effective in meeting the needs of the public, regulators or industry participants”. It finds evidence that such disclosure requirements result in, among other things, lower market liquidity, and an increased likelihood of short squeezes. Overall, the benefits of these disclosure requirements seem negligible in comparison with the increases in the cost of capital and the associated negative impact on the real economy.

The study’s authors say market transparency on short positions is desirable and can be achieved more effectively than the current proposals by the publication of either aggregated or anonymous short positions.

The study recommends that European policymakers adopt a regulatory framework in line with other major financial jurisdictions, none of which rely on public disclosure by individual managers. Private disclosure to regulators and public disclosure of, for example, short interest, has proven to be a “balanced” approach, says the study.

“The hedge fund industry supports increasing market transparency through the publication of aggregated short positions. We also support reporting of positions to national regulators. But as the findings of this independent study highlight, there are serious unintended consequences of disclosing individual managers’ positions to the market – including a decrease in liquidity, lower returns for end investors including retail investors, and the likelihood that investments will move to other jurisdictions where returns are not constrained by inappropriate regulations,” said Andrew Baker, CEO, AIMA.

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