The Short Selling Saga: Market Volatility & Compliance
The Big Short. Or Long. Whatever your strategy, the drama currently being played out between hedge funds and retail investors — in issuer names like GameStop, Blockbuster, AMC, and [insert name of next targeted guinea pig] — reminds us that market volatility is unpredictable. The lesson for regulatory attorneys and compliance departments, therefore, is one of containment. In other words, don’t let market turmoil affect your number one priority, which is to stay on the right side of the rules.
Concentrated short selling, for example – or even taking large stakes on the long side – create under-the-radar regulatory obligations (currently being overshadowed by the valid market manipulation concerns in today’s Reddit vs. hedge fund saga). In many markets around the world, such as the UK, the EU and Japan, immediate disclosure requirements are triggered when taking a short position amounting to just one-tenth or two-tenths of a percent of an issuer’s outstanding shares. Even more markets – about 100 countries – require immediate filings on the long side, albeit at slightly more relaxed levels (such as 1%, 3% or 5% of issuer outstanding). These rules are determined by where you invest, not where you are based as an investment firm.
Thus, investing in 20 different markets means you’re subject to 20 different local disclosure regimes (regardless of where your firm is located). The filing deadlines range anywhere from the same day to 7 days, depending on the jurisdiction. In the EU for example, taking a short position of at least 0.1% of an issuer’s shares triggers a filing requirement due to the local regulator the next day at 3:30pm. The penalties vary, ranging anywhere from a proverbial “slap on the wrist” to criminal proceedings, monetary fines in the millions, and public exposure.
There’s only so much you can control in the markets. Control what you can by monitoring your investment holdings, knowing the rules, and filing your disclosures. For more information on mitigating short selling risk or on global investment monitoring, email our Regulatory Guidance experts at firstname.lastname@example.org.