[ M A R K E T
R E V I E W
A
curious story emerged ear-
lier this year when a man
was charged with planting
a bomb under the Borussia Dort-
mund football club team bus in
April. It was initially suspected as
the work of terrorists but the truth
was actually much stranger—it was
a short seller.
The man, a 28-year old known
only as Sergei W, set the bomb to
profit from 15,000 put options he
had purchased in anticipation of
the club’s share price slumping
post-attack. Ironically, the damage
from the bomb was shrugged off in
the financial markets. The club’s
shares fell further after Dortmund
had been eliminated from the
Champion’s League the week after
the attack then on that particular
day.
This odd tale might confirm the
nefarious reputation that many
short sellers have in the public
eye. The European short selling
regulation (SSR)—established in
2012—came out of the woes of the
financial crisis and was designed in
reaction to the public disapproval
of short sellers who were blamed
for exacerbating the crisis and
profiting from the losses of others.
The rules, which were drawn up
by the European Securities and
Markets Authority (ESMA), focus
on market discipline and disclo-
sure. Firstly, naked short selling is
prohibited. Short sellers need to
have borrowed, or have an expecta-
tion of borrowing, securities which
can be delivered on settlement.
More significant is short selling
disclosure. Investors must private-
ly notify the trading venue they
are using if they are shorting more
than 0.2% of the total issued equity
of a company and publicly disclose
at 0.5%. On top of this, additional
notifications and disclosures are
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Autumn 2017
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required for every 0.1% addition-
al short position of issued share
capital above these two thresholds.
According to participants, the
disclosure rule is onerous and time
consuming and, in the case of the
public reporting requirement, can
lead to front running or herding ac-
tivity. Indeed, according to Oliver
Robinson, associate director, mar-
kets regulation, at the Alternative
to complete these notifications,”
says Robinson. “The range of
individual notification platforms
and mechanisms across countries
means that each report has to be
submitted manually. And because
the issued share capital figure
provided by commercial providers
is often incorrect, it must be double
checked.”
There is no doubt that the disclo-
“In terms of members having issues with
regulations this is always in the top two or three.”
OLIVER ROBINSON, ASSOCIATE DIRECTOR, MARKETS REGULATION,
ALTERNATIVE INVESTMENT MANAGEMENT ASSOCIATION
Investment Management Associa-
tion (AIMA), the short selling rules
are regularly cited in the top three
most contentious bits of legislation
by alternative fund managers.
“In terms of members having
issues with regulations this is
always in the top two or three,”
says Robinson. “The public dis-
closure can create a herding effect
or people deliberately trying to
squeeze those who have got a short
position. It was a politically driven
rule post-2008 in response to per-
ceived speculation and profiting off
downward moves.”
Exploiting loopholes
The added administrative burden
on participants to comply with
the disclosure rules is not easy,
say participants. Investors have to
place a close watch not only their
own positions, but also on the
issued share capital for a company.
This is made more complex by the
lack of an obligation for issuers to
publish this figure and absence of a
centralised database in the market
which tracks this information.
“It can several hours per day
sure rules have changed the way
that short sellers do business.
“If you have to disclose a short
position you might find it harder
to get boardroom access,” says
Cyrus Pocha, a senior associate at
Freshfields. “Companies are not
enamoured when they find their
stock is being shorted.”
At the same time, there remain
loopholes around the SSR which
hedge funds have been seeking
to exploit. Earlier this year Tiger
Global hedge fund, which has
$20bn in assets under manage-
ment, was brought to the public’s
attention for shorting shares in
Tesco using an offshore shell
company registered in the Cayman
Islands with the aim of maintaining
anonymity. It is not the first time it
has done so—the hedge fund was
also involved in the same activity
in 2014. “It is a roundabout way to
do short selling and mask who is
doing it,” says Pocha. “But that’s
an outlier rather than the common
position.”
Industry pressure
Bearing all this in mind the