Principled Regulatory Action? The Case of Short Selling

Mid-September 2008 saw governments around the world initiating emergency regulatory action to ban short selling. Short selling is a practice that has existed for many years and is regarded as a valuable activity to aid price discovery by the market. If regulatory action by securities regulators is aimed at promoting an efficient and informed market, actions to ban or restrict short selling may prove to be out-of-step with the objectives and principles of securities regulation. This paper examines the initial regulatory responses with respect to short selling from the perspective of three jurisdictions namely UK, Australia and the USA. The paper demonstrates that the regulatory responses differed due to the different 'standing starts' from which each regulator began the race to respond to the volatility in securities markets. It also illustrates that the different standing starts reflect the different problems with short selling in the particular jurisdiction. Thirdly, it shows how delegated rule making powers were used by each regulator to make rules that included rules with criminal sanctions attached. Finally it highlights the potential difficulties that global initiatives seeking a common approach to short selling regulation face. Such potential difficulties arise to threshold issues such as the nature of the relationship between the seller and the securities that make a sale of that security a short sale. The paper offers a definition of short selling that takes into account the various ways in which the share/stock may be sourced for settlement. By examining the regulatory objectives of each of three regulators, the FSA, ASIC and the SEC, it examines how an outright ban on certain short-selling combined with a disclosure regime for other short-selling fits in with the policy and objectives of securities market regulation articulated by the International Organisation of Securities Regulators