Monday, May 27, 2024

SEC to require greater disclosure of short positions

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The SEC has voted to require greater public disclosure of short positions, with far-reaching implications for hedge funds.

The new rules still leave the US short of the publication of individual hedge fund shorts, as imposed in Europe by Esma’s daily disclosures regime. But more data will be reported on these to US regulators:

  • Investment managers holding large short positions in US stocks will be required to report them to the SEC within two weeks after each month, as well as related short sale activity.
  • The threshold for reporting will be hit when an individual short position in a stock is at least $10m or the equivalent of 2.5% or more of the total shares outstanding.
  • The threshold for reporting short positions in non-reporting issuers would be $500,000 on any given settlement day of the month.

There will be more disclosure of stock-lending, which will give the public knowledge of which companies are drawing the attention of short-sellers.

“Given past market events, it’s important for the Commission and the public to know more about short sale activity in the equity markets, especially in times of stress or volatility,” said Gary Gensler, SEC chair.

The move has received industry pushback. Concerted buying of GameStop shares by retail traders teaming up to target stocks with noted short interest led to the demise of Melvin Capital, and this move may make short-sellers even more wary of repeat episodes in future.

Jack Inglis, CEO of Aima, said: “This disclosure is another regulatory intervention that will not aid efficiency but likely impede short selling activity, disincentivize fundamental research and thus harm markets.”

But he welcomed the move not to force disclosure of individual shorts.

“We know from the EU experience that this significantly limits implementation of long/short strategies and therefore curtails market liquidity,” said Inglis. “Providing a higher quality of aggregate data on short interest to the market instead is the best way to address the need for adequate transparency.

“However, we do not believe the extensive reporting of even the smallest variations of short positions to the SEC is warranted and will result in unnecessary operational burden as well as risk data leakage.”