Chapter 3: The Vexed Issue of Short Sales Regulation when Prohibition is Inefficient and Disclosure Insufficient
Emilios Avgouleas1 INTRODUCTION Overview Short selling normally describes the sale of securities that the seller does not own.2 In the most common scenario, the seller borrows the securities concerned and engages in relevant transactions against a commitment to buy the securities back later at a lower price, returning also any borrowed shares to the lender. Apart from moral concerns, the main economic issues arising from trading securities that an investor does not own3 relate to short 1 Professor of Financial Law and International Financial Markets, School of Law, University of Manchester. Although some sections of this chapter draw on an earlier article, published in the Stanford Journal of Law, Business and Finance, this is a totally revised and updated work. The revision of this chapter was completed in May 2011. The chapter does not discuss critical market and regulatory developments beyond this point. 2 IOSCO’s Consultation Paper on the regulation of short selling suggests that short sales should generally be understood as transactions characterized by the presence of two factors: ‘(i) a sale of stock that (ii) the seller does not own at the point of sale’. IOSCO, Technical Committee, Regulation of Short Selling – Consultation Report (IOSCO, 2009) (IOSCO Report), Appendix III, at 24. 3 IOSCO’s Report suggests that a trader should be regarded as owning the securities in which she trades when: ‘(i) the seller has purchased or entered into an unconditional contract to purchase the stock but has not yet received delivery; (ii) the seller has a title...
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