Ensure UK Short Selling Regulation revision receives robust democratic oversight
I would like to ask the Treasury Committee to take a keen interest in the current process of reviewing, with regard to amending, the UK regulation of Short Selling.
In response to the 2008 Global Financial Crisis, the EU proposed a raft of changes to regulate this practice. Some of these were implemented, but those addressing the massive issue of "naked shorting," were never introduced.
Short selling is the practice of borrowing other peoples' shares in order to sell them, realising money. The short seller then hopes that the share price falls, allowing the them to buy them back, to return them, at a lower price than they sold the borrowed shares for. Thus, making a profit at the expense of the actual shareholders, who they borrowed them from. Better still for the short seller, if the company can be caused to become bankrupt, the value of the borrowed shares is zero, so they get to keep all the money they sold someone else's shares for. And get this, if the company becomes bankrupt they also avoid paying any capital gains tax! Unbelievable isn't it? But it gets worse...
Another, even more harmful, tactic often used by financial institutions is "Naked" short selling. Here the short seller just "creates," rather than actually borrows, shares, that they then sell. This reduces the share price and earns them money, while at the same time exposes them to absolutely no risk. This process has obvious massively harmful effects on the companies, their employees, and wider society, while enriching unscrupulous financial institutions.
Within the last 2 weeks the EU has voted to remove many of the protective changes, introduced after 2008. One particularly important rule, obliging anyone who practices naked short selling, to buy back these synthetic shares, within 4 days of their creation, has been removed.
This decision has been taken at a time of extreme risk for financial markets (think Credit Suisse - who have been enabling these practices.)
I call on your committee to ensure that none the UK's current regulations which serve to address naked short selling are removed or diluted. Further, I suggest that new regulations, aimed at preventing illegal naked shorting, should be introduced.
I am concerned that far-reaching exceptions will be introduced for the benefit of financial institutions which practice naked short selling. At a minimum, I call on the committee to continue the current level of restrictions.
In addition a transparent and rapid audit process, which monitors open short positions (rather than relying the financial institutions to self-report) should be introduced.
There should also be a ban on naked short selling, without exception, unless the created shares are bought back within 4 days. This should be backed up by strict enforcement by a supervisory body, with the power, and the will, to enact sufficient punishment to deter these practices.