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US to Outlaw Some Short-Selling Amid Wall Street Crisis - Report
US securities regulators are expected to adopt new measures against abusive short-selling as early as this week in response to financial market turmoil, according to people briefed on the situation, the Financial Times said.
Short-sellers aim to profit from share declines, usually by borrowing a stock, selling it and buying it back after its price has decreased. In "naked" short-selling, shares are sold without being borrowed first.
The practice has become increasingly controversial, not least because many companies, including investment bank Lehman Brothers – which filed for bankruptcy on Monday – had claimed that short-sellers were engaging in campaigns to drive down their share prices.
The Securities and Exchange Commission, which planned to enact two new measures at the end of the month, is now under growing pressure to act sooner.
It was unclear what impact, if any, naked short-selling had on the acceleration of the fall in Lehman’s share price in the past week. But the latest market developments “should move the SEC to do more about naked short-sellers,” said John Coffee, professor of law at Columbia University.
However, the new rules, if approved by the SEC, would differ from the emergency measure which had protected a select group of financial shares, including Lehman’s, until it expired last month. The emergency measure had required traders to borrow the security first and deliver at settlement.
Under the new rules, brokers would have to deliver shares that have been sold short and it would be illegal for short sellers to deceive brokers about their intention to deliver shares.
They may also eliminate an exemption that options market-makers had from delivering shares of companies placed on so-called “threshold” lists – which have a high number of borrowed shares that have not been delivered.
Some of the elements could help to guard against abusive short-selling. However, they would fall short of calls by some market participants to extend the provisions of the emergency order to the rest of the market.
The SEC declined to comment.
