“Common sense” call for short selling legislation

Regulators must use “common sense” when introducing short selling legislation and avoid using securities lending as a “proxy” for the practice, a leading figure in the securities lending industry has told GSL.tv.

Simon Lee, senior vice president, business development at eSecLending, was speaking in the wake of comments by Steny Hoyer, US House Majority Leader.

Hoyer told a press conference in Washington earlier in the week about his proposed regulations which will require brokers to provide daily information on the identity of short sellers and companies whose shares are being sold short, as well as providing compensation for the owner of the stock.

However, Lee warned that regulators must not consider securities lending and short selling to be the same mechanism when formulating rules.

“You can’t directly use securities lending as a proxy for short selling because people borrow for many, many reasons,” he said.

“One of them is obviously to cover a short position but there are plenty of other reasons.”

Mainstream media coverage has in the past caused short selling and securities lending to be viewed as a single subject in the public’s mind, Lee added.

“There has not been enough distinction between short selling and securities lending in the mainstream media, when clearly they are completely different processes with different dynamics and it’s wrong to lump them together and put them in the same pot,” although he added that coverage has improved in recent times.

Lee also disagreed with Hoyer’s point on compensation, given that beneficial owners are already compensated for lending shares.

“You’re not being compensated because of what’s happening on the other side of the trade you’re being compensated for lending the securities, period. Whatever the economic outcome of the trade that the end borrower has entered in to, the lender should not be impacted.”

However, Lee did acknowledge that short selling regulations are likely to include increased disclosure in the future, despite the US Securities and Exchange Commission recognising that it provides liquidity to the market and extra transparency around pricing.

“The markets expect there to be more disclosure around short selling activities – it’s an accepted viewpoint that there will be more disclosure around short selling,” he said. “What form that takes is hard to call.”