CSA and IIROC affirm benefits of short selling, and cites 'robust framework' in place to monitor and intervene when necessary
The past several weeks have brought outsized financial-market volatility across the world, leading some countries to introduce restrictions aimed at curbing risks from short selling. But at the moment, Canadian regulators are not making such moves.
In a joint statement, the Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Organization of Canada (IIROC) said that while it is monitoring decisions in other jurisdictions, there is no evidence to suggest that recent market declines in the domestic market has been driven by short selling activity.
“IIROC's data shows that short selling activity continues to represent a low percentage of total market activity and remains consistent with short selling activity prior to the pandemic,” the statement read.
CSA and IIROC noted that short-selling offers benefits to investors, particularly as they underpin many investment and risk management strategies that depend on both long and short exposures. Changes or new restrictions to short selling, they said, could negatively impact those benefits, as observed by research conducted following the prohibition of short sales on financial securities in 2008.
“IIROC has a robust framework in place to monitor short selling, and detect and intervene in instances involving abusive or manipulative trading,” the statement said. Aside from requiring that each short sale be marked, the current rules and legislation prohibit dealers and investors from initiating short sales without the expectation to settle the trade.
Short positions and failed trades, the statement noted, must be reported to IIROC, which has the ability to declare any security ineligible for short-selling as warranted by circumstances. A summary of reported short positions, as well as a summary of short sale activity, is published bi-monthly on the IIROC website.
“The CSA and IIROC will continue to examine new information from any market participant, including issuers and the public, regarding suspected instances of abusive short selling and other forms of market manipulation,” the statement said, adding that short selling on particular securities may be considered depending on new information or analyses.
