Global watchdogs crack down on some short selling

By Huw Jones

LONDON (Reuters) - Global market supervisors sought on Friday to forge a more common approach to regulating abusive types of short-selling of shares by cracking down on settlement failures and stopping short of an outright ban.

The International Organisation of Securities Commissions (IOSCO) policymakers adopted four principles its members agree to apply in their own markets to oversee a trading strategy critics say amplified the effects of the credit crunch.

The principles broadly cover the need to maintain market stability, and for effective reporting regimes and enforcement.

IOSCO comprises market watchdogs from over 100 countries, including the United States, Japan and the 27-nation European Union, who regulate over 95 percent of the world's securities markets.

Short selling is the sale of shares not already owned in the hope prices will fall. Many countries introduced curbs from last September after the collapse of Lehman Brothers bank which sparked heavy selling in financial stocks.

IOSCO said there was a need to punish failures to settle trades. The aim is to crack down on naked short selling whereby no prior share borrowing arrangements were made in time.

"As a minimum requirement this should impose strict settlement, such as compulsory buy-in, of failed trades," IOSCO said in a statement.

By focusing on tackling settlement failures, regulators can avoid a legal minefield of defining naked short selling and pre-borrowing, said Martin Wheatley, chief executive of Hong Kong's Securities and Futures Commission SFC.L who chaired IOSCO's short-selling task force.