makeuwonder: Here is the latest Article from the WSJ Clarifing the Issue
WASHINGTON -- The Securities and Exchange Commission's new rule designed to limit certain negative stock bets is set to start Monday. Already, a political backlash is brewing.
Last Tuesday, the SEC said it would tighten short-selling rules for 19 financial firms, including mortgage titans Fannie Mae and Freddie Mac, by requiring traders to "pre-borrow" stock before initiating a so-called short sale. The SEC said it had concluded "there now exists a substantial threat of sudden and excessive fluctuations of securities prices generally" that could affect orderly markets.
Shares in financial stocks on the list soared, in part because of the SEC's move, prompting a chorus of complaints from firms that weren't included, many of which have been equally battered in recent weeks.
In a short sale, a trader borrows stock and then sells it, in hopes that it will later fall in price so it can be repurchased at a profit. SEC Chairman Christopher Cox has insisted he isn't opposed to legitimate short selling -- only "unlawful manipulation through 'naked' short selling that threatens the stability of financial institutions."
In a letter to Mr. Cox, the American Bankers Association, a trade group that represents the interests of 8,500 banks, said it fears short sellers will now focus on banks not covered by the new rules, many of which are already big targets of short sellers.
"The emergency order could further exacerbate a loss of confidence in the safety and soundness of this country's banking industry," the ABA wrote, as it called for an expansion of the order to including stocks of banks and bank holding companies.
The Financial Services Roundtable, an organization that represents 100 of the largest U.S. financial companies, also asked the SEC to extend the order. It wants to have all financial-services companies covered in the second week.
A SEC spokesman said the agency doesn't comment on letters, but said it will collect all of the comments as it moves forward with its decision-making. Mr. Cox previously said the emergency order was a preventive step aimed at restoring market confidence, and stocks were chosen based on which firms had access to the Federal Reserve's lending facilities.
The SEC order can be in effect for as long as 30 days. It's unlikely it will make any amendments to the emergency order to include stock of these other firms, a person familiar with the matter says. However, the SEC said it is considering extending the protective measure to all stocks that trade in the U.S. at a future date.
The list includes major Wall Street brokerage firms, banking titans J.P. Morgan Chase & Co. and Citigroup Inc., as well as several non-U.S. banks.
The emergency order says traders need to lock up, or pre-borrow, stock for future delivery before they execute a short sale, or bet the stock will drop. The SEC says that will "eliminate any possibility" that the markets will be disrupted by naked short selling, which occurs when the trader never borrows the stock and then "fails to deliver" it to the buyer within three trading days.
On Friday, the SEC said market makers wouldn't have to pre-borrow the stock, but they would still need to deliver it within three days.
These "fails to deliver" can occur from clerical errors, and the SEC says they are often resolved within a few business days. But they can create downward pressure on a stock price, and when not covered over extended periods, could be a sign of abusive short selling.
Full Story: online.wsj.com
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