NEWS

In comments on the EU staff consultation on short selling , the Interntional Montary Fund weighs in with strong evidence to show that restraints on short selling have harmed markets.

1. No strong evidence that SS led to falling prices. “Evidence suggest that most of the adverse market movement in the current crisis can be attributed to fundamental factors and to uncertainty due to partial or inadequate disclosures.”

2. Bans harmed markets.

“In Europe, various market authorities banned (naked) short sales of financial stocks in September 2008 but this did relatively little to support the targeted institutions’ underlying stock prices, while liquidity dropped and volatility rose substantially. Annex 3 suggests that market efficiency and quality in fact deteriorated substantially following the introduction of the various bans. Moreover, many of the financial institutions subject to short sales bans also are cross-listed, which created legal and territoriality issues as regards enforcement.”

3. Effective supervision needed. New rules will be ineffective if there isn’t effective regulation that enhances price discovery while preventing price distortions.

4. Pan-European disclosure with more disclosures that do not overburden market participants.