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Additional regulation of short sales is not required in Canada: TMX Group

Date: Tuesday, May 4, 2010
Author: Investment Executive

More regulation of short sales in Canada is unwarranted, and Canadian regulators should not impose new short sale rules recently introduced by the U.S. Securities Exchange Commission, according to TMX Group Inc.

TMX Group stated its position on short sale regulations in Canada in a recent letter to the Canadian Securities Administrators. The letter considers the impact that the SEC’s recently published amendments to Regulation SHO could have in Canada.

“TMX Group believes that additional regulation of short sales in Canada is not warranted,” said Tom Kloet, TMX Group CEO. “In our view, adopting the recently-amended U.S. rules around short sales would add unnecessary costs to the industry without resulting in a corresponding benefit to investors.”

The SEC announced amendments to Regulation SHO in late February, placing certain restrictions on short selling when a stock is experiencing significant downward price pressure. In particular, the amendments restrict short selling from further driving down the price of a stock that has dropped more than 10% in one day. In such situations, the rules will enable long sellers to stand in the front of the line and sell their shares before any short sellers.

The measures are intended to promote market stability and preserve investor confidence.

“It is important for the Commission and the markets to have in place a measure that creates certainty about how trading restrictions will operate during periods of stress and volatility,” said SEC Chairman Mary Schapiro in announcing the amendments.

Kloet argued that costs of making such amendments in the Canadian market would far outweigh any potential benefit.

He pointed out that analysis shows that Canada has not experienced the degree of abusive or naked short selling that other jurisdictions may have experienced. Nor has there been evidence of increasing failed trade levels or other abuses of short selling that would require additional regulation.

TMX Group added that it would be extremely difficult for Canadian short sale rules to harmonize to the SEC amendments, since the rules in the two countries are different.

Furthermore, recent amendments to the Universal Market Integrity Rules short sale rules by the Investment Industry Regulatory Organization of Canada have enhanced its ability to monitor failed trades, and have enabled it to deal with problematic short selling on a case-by-case basis, according to TMX Group.

“We are confident that the UMIR short sale rules combined with vigilant surveillance and enforcement by IIROC provide protection to our market,” said Kloet.