AIMA: New Report Says Disclosing Short Positions Would ‘Distort’ Markets

Feb 1 2011 | 8:34am ET

An independent report commissioned by the Alternative Investment Management Association and sponsored by Deutsche Bank says an EU proposal for public disclosure of the net short positions of individual managers “risks distorting financial markets.”

The report, by international management consulting firm Oliver Wyman, says such disclosures would not be effective in “meeting the needs of companies wishing to raise capital, investors seeking efficient risk management or regulators addressing financial stability.”
 
European lawmakers are still debating the European Commission’s draft short-selling regulations, which would see public disclosure of individual managers’ net short positions above 0.5% of outstanding share capital.

The Oliver Wyman study suggests such disclosure requirements could result in lower market liquidity and an increased likelihood of short squeezes. Overall, the report finds, the benefits of these disclosure requirements seem “negligible” in comparison with the increases in the cost of capital and the associated negative impact on the real economy.
 
The study’s authors say market transparency on short positions is desirable and can be achieved more effectively by the publication of either aggregated or anonymous short positions.
 
The study recommends that European policymakers adopt a regulatory framework in line with other major financial jurisdictions, none of which rely on public disclosure by individual managers. Private disclosure to regulators and public disclosure of, for example, short interest, has proven to be a “balanced” approach, says the study.
 
“The hedge fund industry supports increasing market transparency through the publication of aggregated short positions. We also support reporting of positions to national regulators. But as the findings of this independent study highlight, there are serious unintended consequences of disclosing individual managers’ positions to the market—including a decrease in liquidity, lower returns for end investors including retail investors, and the likelihood that investments will move to other jurisdictions where returns are not constrained by inappropriate regulations,” said AIMA CEO Andrew Baker.
 
A vote by the European Parliament’s Economic and Monetary Affairs Committee on possible amendments to the Commission’s original draft regulations could take place on February 14, 2011.


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