Six Senators Urge SEC to Work With DTCC on Short-Sale Database
By Edgar Ortega
July 23 (Bloomberg) -- The Securities and Exchange Commission should develop a central database of stock loan information to curb abusive short sales, six U.S. senators urged in a letter to the agency's chairman.
The SEC should "urgently consider" a proposal that would stiffen rules requiring brokerages to locate a willing lender of a stock before completing a short sale, according to the letter whose backers include Republican Orrin Hatch and Democrat Robert Menendez, both members of the Senate Finance Committee. Under the proposal, investors would have to identify the actual shares they intend to borrow in a central database operated by Depositary Trust & Clearing Corp.
"One share owned would be one share located -- and ultimately one share delivered on time," the senators said in the letter. "This proposal potentially represents a great stride forward and a substantial improvement on current short sale market practices."
The SEC, led by Chairman Mary Schapiro, is weighing multiple rules to dictate when traders can bet shares will fall, after lawmakers and business groups said short-sellers fed last year's plunge in financial shares and the collapse of Lehman Brothers Holdings Inc. The SEC last year enacted rules that have almost eliminated naked short selling, so called because a trader has shorted a stock without obtaining a loan.
'Abusive Short Sales'
"We share the Senators' interest in effective protection against abusive short sales," SEC spokesman Kevin Callahan said. He declined to comment on the specific proposal.
In a short sale, traders borrow stock and then sell it, aiming to profit by repurchasing shares at a lower price, return the borrowed shares to the lender and pocket the difference.
The proposed DTCC database would prohibit multiple investors from executing short sales relying on a single indication of an available loan. It would make them match their short sales with a specific set of shares available to borrow.
"This centralized 'hard locate' system seems to offer a viable way to eliminate 'over selling' of stock inventories, in that there would no longer be multiple locates on the same shares of a security," the senators said in the letter.
In addition to Menendez, Democrats Ted Kaufman of Delaware, Jon Tester of Montana, Sherrod Brown from Ohio, and Carl Levin of Michigan also signed the letter. Among Republicans, Johnny Isakson of Georgia and Hatch, who is from Utah, signed.
DTCC guarantees and settles all stock transactions in the U.S. The New York-based company is privately held and owned by its users, which include all of the largest U.S. brokerages.
To contact the reporter on this story: Edgar Ortega in New York at ebarrales@bloomberg.net.
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