The Alternative Investment Management Association (AIMA) – the global hedge fund industry association – says the proposals on short selling and over-the-counter (OTC) derivatives published today by the European Commission could help remove uncertainty and confusion in the market.
However, AIMA said the proposals contained a number of flaws that it hoped would be addressed. The short-selling proposals, which apply to credit default swaps (CDS) as well as to publicly traded securities, will create harmonised, pan-European rules on short selling, while the OTC derivatives reforms will mandate central clearing of eligible contracts.
AIMA ceo Andrew Baker said: “In the interests of international regulatory consistency it is desirable that the Commission is harmonising rules in both these fields. One of the major problems that the industry has faced in respect of short-selling regulation was that some EU jurisdictions acted unilaterally and arbitrarily in imposing and then lifting bans. A common regime that concentrates on reporting rather than bans is the way forward.
“We are also glad that the Commission has acknowledged that short selling enhances market liquidity and aids price discovery. We do hope however that new powers to ban short selling are never used. Such bans have never worked, and indeed all the evidence is that the shorting bans during the crisis made the situation even worse. And while we support increased transparency in the field of short-selling, we think short position reporting by individual firms should be only to the regulator. The market should receive aggregate position reporting only.”
AIMA also welcomed the fact that sovereign CDS will continue to be permitted under the new regulations. “Sovereign CDS have entirely legitimate hedging uses,” said Mr Baker.
Many aspects of the draft regulations on OTC derivatives are to be supported, AIMA said. “There is a strong financial stability argument for increased transparency in derivatives settlement, so we do support mandatory central clearing, even though it would mean increased costs for the industry,” said Mr Baker.
“Harmonising requirements for the establishment and operation of central counterparties (CCPs) and trade repositories would also appear sensible,” said Mr Baker. “But we are concerned about the implications for E.U. hedge fund managers that use non-E.U. CCPs. The regulation expects ‘third country’ CCPs to meet stringent conditions in order to be able to serve E.U. managers. This measure is potentially protectionist and we would urge European lawmakers to rethink it,” said Mr Baker.
