Question

Outline the general types of regulations that have been introduced on Short Selling, suggesting reasons for their introduction.

Answer 1

There have been many regulations brought in by the SEC to regulate short selling in the US stock market, prominent ones are the Regulation SHO, Regulation M, proposed rule 10b-21 related to naked short selling.

Regulation SHO was brought into effect to regulate naked short selling and preventing a situation of fail-to deliver securities against the short position by requiring mandatory closure of the position within the threshold limit. There were four main general requirements under the regulation SHO which had to be met, Marking requirement, Short sale price test circuit breaker,Locate requirement, and closeout requirement. Regulation M was brought in to regualte securities in connection with the public offerings. some activities of short securities during these period was put in exception like bona fide purchase,purchase by separate accounts and purcahse by investment companies. while the proposed rule related to naked short sellig was proposed as an anti-fraud rule. The securities exchange commission was concerned that some people deliberately misrepresent that they have the security with them to deliver when required but in reality they do not have, some people intentionally misreported their position to be long even when their overall position was long.

The reason for different regulation was to contain different issues arising out of short selling. Regulation SHO was bring to regulate the situation of fail to deliver securities. Regulation M was brought in to regulate the short selling issues arising out of public offering while rule related to naked selling was brought in to tackle the issue of misrepresentation.