Short Selling Consistency in South Africa

1. Short Selling Consistency in South Africa David E Allen, Robert J Powell and Abhay K Singh

2. Reading Questions • What changes were made to naked short selling rules in South Africa during the GFC? • Who is the regulator for Financial Markets in South Africa? • What is the aim of the regulator? • What are the objectives of the Securities Services Act 2004? • How were South African markets impacted by changes to global short selling rules? • What are the JSE rules regarding short selling? • What impact can restrictions on short selling rules have on liquidity? • What other negative impacts can restrictions on short selling rules have? • Comment on the stability of South African Banks during the GFC. • What are the three key components of the rules which prevent naked short selling in South Africa?

3. Consistency of rules • The rules pertaining to short selling in South Africa remained the same over the pre-GFC and GFC periods. This included: • prohibition of naked short selling • regulated covered short selling was permitted.

4. Regulator • The JSE is regulated by the Financial Services Board (FSB) • The FSB oversee all non-banking financial services including insurers, intermediaries, friendly societies, unit trust schemes, management companies and financial markets • The aim of the FSB is to promote and maintain a sound financial investment environment in South Africa.

5. The Johannesburg Stock Exchange (JSE) • The JSE operates as a self-regulatory organisation, in consultation with the FSB • The JSE makes and enforces rules (including short selling) which comply with the Securities Services Act 2004 • The JSE offers a full range of services including trading in equities, equities derivatives, commodities derivatives, currencies derivatives and interest rate products.

6. The Securities Services Act, 2004 • The JSE operates under this Act, which is overseen by the FSB. • The aims of the Act include: • increasing investor confidence in South Africa • protection of investors • reducing systemic risk and maintaining a stable securities market • promoting international investor competiveness in South Africa.

7. Impact of short sale changes in global markets on South Africa • When restrictions on short sales on certain institutions were introduced in the USA and UK, markets in South Africa moved marginally upwards in line with world markets • When Germany introduced bans on naked short selling, South African markets moved sharply downwards in line with world markets

8. Potential negative impacts of introducing restrictive short selling rules increased volatility reduced liquidity reduction in the speed at which negative information reaches the market

9. Reasons why the JSE was able to maintain consistent rules • Sound surveillance and risk management systems • Sound rules which ensure all short sales are covered • Relative stability of South African banks which makes them less prone to short selling activity

10. Rules which prevent naked short sales • no member may enter any trade on the JSE trading system (STRATE) unless they have appointed a CSDP (Central Securities Depository Participant) which is an institution (comprising mainly major South African banks) approved by the FSB • settlement must occur within 3 days of the trade date with rolling of settlements not permitted.

11. Rules which prevent naked short sales (cont’d) • client must provide evidence that: • they own the securities, or • that another transaction has been concluded which will ensure sufficient securities will be available for settlement, or • that a satisfactory borrowing arrangement has been entered into which will permit settlement to take place.