U.K. equity derivatives officials are concerned the London Stock Exchange may call for increased disclosure from banks and market makers who sell stock short, a move that would threaten equity derivatives desks, which often short to hedge over-the-counter options. Lawyers say the high cost of compliance may mean banks have to rethink hedging strategies and it could ultimately limit the structures they offer. "It is potentially very worrying," said one in-house lawyer. The International Swaps and Derivatives Association's equity derivatives committee is keeping a close eye on the LSE's consultation.
The LSE is consulting informally with banks and market makers about disclosing short selling positions over a certain limit. It will likely reach a decision within the next month, according to Richard Webster Smith, spokesman for the LSE in London. The exchange, however, does not believe there should be full disclosure. "We want information that will help us run orderly markets," said Webster Smith. The exchange can only enforce regulation of member firms, but it is discussing with hedge funds and other entities that trade through the LSE whether it would be possible to reach an informal arrangement to disclose short positions. The LSE decided to launch the consultation after the Financial Services Authority fined Evolution Beeson Gregory GBP500,000 (USD946,891) in November for market distortion through short selling. The consultation by the LSE follows similar moves in the U.S. (DW, 8/6).
Pauline Ashall, partner at Linklaters in London, said disclosure or restrictions on short selling could be a concern for hedging. But the devil will be in the detail of potential regulation, especially for hedge funds, which may also be affected by disclosure requirements, according to lawyers. Funds may face an increased compliance burden and if they are required to provide detail of their positions it may put them off shorting stocks.
