Regulatory Corner & J.P. Morgan in the News

Regulatory Corner

The first quarter saw continued focus on short selling and market reform and brought significant regulatory developments in Europe and the United States.

SEC imposes new short selling restrictions

On February 24th, 2010, the Securities Exchange Commission (SEC) adopted amendments to Rules 201 and 202 of Regulation SHO to impose restrictions on short sales when the price has declined 10% from the prior day's closing price. Once this 10% price decline circuit-breaker is triggered, short sales would only be permitted at a price above the current national best bid for the remainder of the trading day and the following day unless the short sale is covered by an exemption in the rules. The rule will apply to all equities listed on exchanges and in the over-the-counter market.  These amendments will be effective on May 10th, 2010 and include a six-month implementation period so effectively will be in place in October 2010.

This alternative “uptick rule” is designed to restrict short selling from further driving down the price of a stock. The SEC resisted reinstating the original rule which prevented stocks from being shorted unless the last tick in their price was up, but it recognised that there needed to be some control when a stock loses more than 10 per cent. Mary Schapiro, SEC chairman, said the introduction of the rule was “designed to preserve investor confidence and promote market efficiency.”

CESR proposes a pan-European short selling disclosure regime

On March 2nd, 2010, the Committee of European Securities Regulators (CESR) published a report setting out a proposed model for introducing a pan-European short selling disclosure regime.

The short selling disclosure regime proposed by CESR is a two tier-model for the disclosure of significant individual net short positions in all shares that are admitted to trading on an European Economic Area (EEA) regulated market and/or an EEA Multilateral Trading Facility (MTF), when the primary market of those shares is located in the EEA. Under the proposed regime, at the lower threshold of 0.2%, positions should be disclosed to the relevant competent authority. In addition, steps of 0.1% would trigger further disclosure obligations. After the position reaches the higher threshold of 0.5% and any additional steps of 0.1% thereafter, the position should be disclosed to the competent authority, as well as to the market as a whole.

The prospect of a uniform European short selling regime will in principle be welcomed by market participants in place of the divergent requirements presently in force in different jurisdictions.

Other developments

At the UK Financial Services Authority's request, the London-based Securities Lending and Repo Committee recently set up an Education and Documentation sub committee with a remit to produce and distribute guidance materials for beneficial owners. J.P. Morgan is represented on this committee, which is chaired by the National Association of Pension Funds. Currently the group is developing a securities lending made simple guide, a beneficial owners’ checklist and an agent disclosure code. The committee expects to publish its conclusions and final documentation in the third quarter of 2010.

J.P. Morgan will continue to keep clients apprised of regulatory developments and related industry initiatives. For more information please contact your securities lending relationship manager.

J.P. Morgan in the News

J.P. Morgan was recently recognised by The Asset  with fourteen Triple A Transaction Banking Awards, including Best in Securities Lending and Best Tri‑Party Services Provider.

The other Triple A awards we received were Best Securities and Fund Services Provider; Best American Depositary Receipt (‘ADR’) Bank; Best Depositary Receipt Bank; Custodian Banker of the Year – Laurence Bailey, Asia Pacific chief executive officer of J.P. Morgan Worldwide Securities Services; Best Sub-Custodian in Taiwan; Best Cash Management Specialist – Financial Institutions; Best Cash Management Specialist – Liquidity Solutions; Best Cash Management Bank – Australia; Best Cash Management Bank – Japan; Best Cash Management Deal for an Integrated Treasury Solution – Cognizant; Best Transaction Bank – Australia; and Best Transaction Bank – Japan.

The Asset’s Triple A Transaction Banking Awards are amongst the most prestigious honours in the finance industry across the Asia Pacific region. With a rigorous assessment process, the awards recognise institutions and individuals that have made a significant contribution to the development of the finance industry.

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