Regulators loosen their grip on shorts

lending market, the association said it was encouraging to see the industry moving on from a restrictive environment. Elsewhere in this guide, PASLA chair Jason Wells refers to ongoing conversations with the Philippine Stock Exchange to support its planned short selling launch that have made “encouraging progress”.

He also observes that the introduction of an onshore bilateral securities lending and borrowing facility will facilitate investors to engage in transparent, well-regulated and covered short selling activities in Indonesia, increasing the liquidity and efficiency of the country’s capital markets.

Increased resilience

PASLA believes this will enable better price discovery and greater market resilience, especially during periods of heightened volatility.

As markets continue to normalise post-Covid, it is inevitable that restrictions introduced during the height of the pandemic will continue to be removed. The key issue for market participants is the pace at which these limitations are removed - and the extent to which they return markets across Asia Pacific to the conditions that prevailed prior to 2020.

As early as 2021, trade associations and securities financiers were advocating a return to more normal market conditions. As we reported last year, some of the strongest criticism of these bans came from the PanAsia Securities Lending Association (PASLA). In its 2021 review of the regional securities

Stewart Cowan, executive director, head of APAC securities finance product at S&P Global Market Intelligence explains that short selling restrictions exist in South Korea, Indonesia, and Thailand. “Taiwan previously had restrictions in place, but these were lifted in February 2023,” he adds. “South Korea is the most prominent securities lending market amongst these countries. During 2022, balances declined by $1.8bn (£1.4bn), a fall in demand that also affected average fees in the market which declined from 2.48% in January to 1.81% in December as demand for South Korean equities declined.”

Andy McCardle, head of EquiLend Asia observes that since the easing of the short sell ban, Korea has grown back to levels similar to before the ban - even though the list of shortable names is around a tenth of what it used to be.

“With talk of Korea lifting the short selling ban on yet more names, there is a strong appetite and potential opportunity in that market, although it is likely to not happen at least until after the country’s elections in April 2024,” he says. “With a strong desire to be moved to ‘developed’ status, the short selling restrictions could be one potential barrier to that change.”

Korea is most affected by short selling bans, with only 350 names eligible for short selling. While this is impacting market volumes, McCardle suggests it is not as large an impact as might be expected as there is strong demand in the market.

He adds that Korea is a market that is so heavily owned by retail investors that in some ways there is a justification for the ban in the short term.

Market inflation?

“In the longer term, however, most market participants see such bans as artificially inflating domestic markets at times and so can lead to a more significant drop and impact to those retail investors when it happens,” says McCardle, adding that there is little evidence that short selling bans increase market stability.

South Korea is the most prominent securities lending market amongst these countries. During 2022, balances declined by $1.8bn, a fall in demand that also affected average fees in the market which declined from 2.48% in January to 1.81% in December as demand for South Korean equities declined.

“Indeed, many academics feel that bans have historically led to more volatility in markets compared to those that did not impose similar restrictions,” he says.

According to local reports, the Philippine Securities and Exchange Commission (SEC) has approved the PSE’s plan to introduce short-selling in the market. In a recent interview, SEC chairperson Emilio Aquino said the regulator agreed with the PSE that short selling would provide more liquidity in the market.

Final details of the plan have yet to be confirmed, although there are hopes that short selling will be in place before the end of the year. PSE president and CEO, Ramon Monzon was quoted as saying that this move would encourage major funds and foreign investors back into the market.

In June 2023, Bursa Malaysia announced the expansion of its list of securities approved for short selling, and the Ministry of Finance implemented a stamp duty rate reduction from 0.15% to 0.1% from July 2023.