Industry News and Updates:
Short Selling Restrictions — Recent Developments

The relatively piecemeal and inconsistent manner in which various countries applied short-selling regimes exacerbated liquidity concerns and made compliance more difficult. In response, Securities and Exchange Commission (SEC) Chairman Christopher Cox announced on November 24, 2008 that securities regulators around the globe were forming three task forces, in order to improve coordination of global financial regulation and deal with volatile markets effectively. The task forces would come under the Technical Committee of International Organization of Securities Commissions, or IOSCO, representing 100 securities regulators worldwide.

"The task forces the Technical Committee is forming will help ensure that global capital markets address the current turmoil on a sound basis, and in a well coordinated way," Cox said in a statement.

The first task force on short selling will be chaired by the Securities and Futures Commission of Hong Kong’s Martin Wheatley, and will work to eliminate different approaches to "naked" short sales, including delivery requirements and disclosure of short positions, while minimizing any harm to legitimate securities lending, hedging and other transactions.

British and Italian financial regulators will chair a second task force that will examine ways to minimize risks associated with hedge funds. The third task force, co-chaired by Australian and French securities regulators, will focus on ways to increase oversight of and information around unregulated financial markets and products, including derivatives that trade over-the-counter.

The task forces will present their reports at the next Technical Committee meeting in February 2009, and to the next G-20 summit in Spring 2009.

Industry response to this development has been very positive. On December 5, the members of the Securities Industry and Financial Markets Association, the International Securities Lending Association and the Pan Asia Securities Lending Association collaborated to send a letter to Chairman Cox and Martin Wheatley, Task Force Chairman, to welcome the Task Force on Short Selling and express willingness to working with IOSCO on this subject. J.P. Morgan has been actively involved in these developments as a committee member.

Further positive news came on January 5, 2009. The U.K. Financial Services Authority (FSA) was not proposing to renew its ban on short selling of the stocks of U.K. financial sector companies, but would extend its temporary disclosure regime for significant net short positions in these stocks until end of June 2009. Justifying this, the FSA commented that continuing to require disclosure would reduce the potential for abusive behavior and disorderly markets.

We will report further regulatory developments in our next issue of Securities Lending Quarterly. In the meantime, J.P. Morgan Securities Lending will continue to monitor and advise clients of these developments.

For more information, please contact your securities lending relationship manager.

Richard Steele
Executive Director,
Securities Lending Product Management