We had a close read of the European Parliament’s adopted regulations on short selling and credit default swap disclosure and a few things popped out. These regs were published in the Official Journal of the European Union on March 24, 2012. First of all, this document is not that different from the European Commission’s September 15 2010 proposal. But as time has gone on and we have some distance from the financial crisis, we wonder if it is fair for regulators to mandate public disclosure of large short sale positions in equities and corporate debt, but require only private disclosure on short sales of member-state and EU-wide government debt. Regardless of the politics, it seems like there should be one rule for transparency across financial market products.
First, here is the relevant text from the regulation:
“For shares admitted to trading on a trading venue in the Union, a two-tier model that provides for greater transparency of significant net short positions in shares at the appropriate level should be introduced. At the lower threshold, notification of a position should be made privately to the regulators concerned to enable them to monitor and, where necessary, investigate short selling that could create systematic risks, be abusive or create disorderly markets; at the higher threshold, positions should be publicly disclosed to the market in order to provide useful information other market participants about significant individual short positions in shares.” We conjecture that big short positions will be flagged, publicized and the relevant parties duly reprimanded.
“A requirement to notify regulators of significant net short positions relating to sovereign debt in the Union… should only include private disclosure to regulators as publication of information to the market for such instruments could have a detrimental effect on sovereign debt markets where liquidity is already impaired.” Regardless of size, no short positions in EU member state or EU bank debt will be publicized. The debt of local regions and quasi-governmental entities do not get this special treatment.
Leaving aside questions of whether public short sale disclosures will hamper liquidity (they will) or whether the EU’s intrusionist market views are good for markets and the economy (they aren’t), we wonder whether it is fair to exclude EU national debt from public disclosure. If the intent of markets is full and fair information, this exclusion puts national governments into a special category. This is a similar idea to allowing sovereigns to not post margin for OTC derivative transactions, an exclusion which, in our view, is a recipe for major disaster.
Governments issue debt into public markets and that same debt is valued by public markets. While the EU may want the right to monitor transparency in short selling and intervene when appropriate, shining a spotlight on big equity short positions while withholding it from member-state debt issues seems like skewed market practices.