DJ SEC Looks To Close Gaps In 2004 Short-Sale Rules
By Judith Burns
Of DOW JONES NEWSWIRES
WASHINGTON (Dow Jones)--The Securities and Exchange Commission is looking to
close some of the gaps left open by a package of short-sale reforms adopted in
2004.
At an open meeting Wednesday, the SEC will consider three modifications to its
Regulation SHO, which loosened some short-selling rules while cracking down on
abuses such as "naked" short selling. The changes being considered would tighten
the 2004 rule by eliminating a "grandfather" exception for some hard-to-borrow
stocks, according to individuals familiar with the matter.
Short sellers sell borrowed stocks, profiting when stock prices decline and
shares can be replaced at a lower price. In "naked" short sales, the seller
doesn't borrow or replace shares sold short, a practice Regulation SHO sought to
curb by requiring brokers to locate shares to borrow before executing customer
short sales. The SEC imposed stricter requirements for hard-to-borrow
"threshold" securities, but exempted previously existing short positions, which
the SEC said would avoid potentially volatile trading that might disrupt
markets.
Market data suggest that a big chunk of delivery failures in borrowed stocks
are in positions shielded by the SEC's "grandfather" provision, prompting the
SEC to rethink its stance. Since the volume of shares covered by the
"grandfather" clause is tiny compared with the overall market, "we're
comfortable that this can be done without causing dislocations," said SEC
Commissioner Annette Nazareth.
At Wednesday's meeting, the SEC will vote to seek comment on a plan to
eliminate the "grandfather" protections and bring previously existing short
positions under the stock-locate requirements of Regulation SHO. The SEC will
propose that pre-existing delivery failures be closed out within 35 days after
the rule change takes effect, which will require a second vote by the
commission, likely later this year. Individuals familiar with the plan said it
should put brokers and other market participants on notice now to borrow shares
or close out naked short positions in "grandfathered" stocks.
At the same meeting, the SEC will consider two other changes to Regulation
SHO. One would tighten an exception from the rule for market makers in stock
options, requiring them to close out short sales that hedge an options position
with 13 days after the option expiration date - the same deadline imposed by
Regulation SHO for hard-to-borrow "threshold" stocks. Individuals familiar with
the proposal said the exception for options market makers has been another
source of stock-delivery failures and that tightening it should help reduce such
failures.
A third change the SEC will propose is a minor one that targets an exception
from short-selling restrictions for unwinding net short index-arbitrage
positions, which is available provided the market hasn't declined by 2% or more
from the prior day's close. Individuals familiar with the plan said the SEC will
consider whether to change the market-decline index used to limit the exception
from the Dow Jones Industrial Average to the New York Composite Index.
- By Judith Burns, Dow Jones Newswires, 202-862-6692;
Judith.Burns@dowjones.com
(END) Dow Jones Newswires
07-11-06 1612ET
Copyright (c) 2006 Dow Jones & Company, Inc.
Judith Burns
Reporter
Dow Jones Newswires
(202) 862-6692
fax (202) 862-6644
