By Huw Jones
PARIS, Sept 9 (Reuters) - Plans by European Union regulators for a harmonised crackdown on aggressive short-selling of shares are unjustified, costly and would disclose sensitive trading positions, industry officials said on Wednesday.
The Committee of European Securities Regulators (CESR) has proposed a two-tier system for disclosing short positions in all shares listed in the 27-nation EU.
National regulators introduced measures to restrain or even ban short selling from last autumn after the crash of Lehman Brothers bank sparked heavy selling in financial shares.
Short-selling is the sale of shares not owned in the hope the broker can later buy them more cheaply to settle the trade and pocket a profit. It is a favoured strategy of hedge funds which policymakers want regulated more heavily.
The patchwork of national measures has made operating in a pan-EU stock market a "nightmare", CESR officials said at a hearing on Wednesday where industry officials questioned the need for new rules and ultimate objectives.
"Our members believe it's going to be a complex and costly systems exercise that will take some time to accomplish," William Ferrari, a director at the London Investment Banking Association told a CESR hearing.
The proposals would apply to all shares listed in the EU whereas many of the national measures apply only to financial shares. If positions in American depositary receipts (ADRs) and over-the-counter (OTC) derivatives have a bearing on a short position they should also be taken into account.
"Our members are not convinced there is a need for this much expanded scope. This has not been demonstrated," Ferrari said.
CESR aims to complete work on the proposal by the end of the year and wants the EU's executive European Commission to use it as a basis for a draft law as some national watchdogs currently don't have the legal powers to enforce it.
Hedge fund activity can make up a third or more of volume on
bourses such as the London Stock Exchange
NOT JUSTIFIED
Michael Sterzenbach, secretary general of the German Federal Association of Securities Trading Firms (BWF), said there was little scientific evidence that CESR's proposal was needed.
It threatened to create more negative public sentiment about short selling when it has beneficial effects, Sterzenbach said.
Kevin McNulty, chief executive of the International Securities Lending Association, said it was unclear which problems the CESR proposal was trying to fix. "The case for regulating... it's just not very clear," McNulty said.
CESR Secretary General Carlo Comporti stressed that regulators were not saying short-selling of itself is bad or that it should be banned.
And Michael Treip, an official at Britain's Financial Services Authority who helped draft the CESR proposal, said the aim was not to halt short-selling but put some "grit in the wheel" to avoid markets becoming disorderly in extreme periods.
A short position of 0.1 percent or above would have to be disclosed to the local regulator within a day. Disclosures would become public if a position reaches 0.5 percent of a company's stock.
Industry officials said disclosing individual positions could be damaging to firms and markets, and urged publication of aggregate or total short positions in a stock while names of investors are kept private.
"There should not be public disclosure in the way envisaged," said Graziella Marras of EFAMA, which represents the 6 trillion euro EU mutual funds sector.
"If that is deemed necessary then it should be in aggregate form and with appropriate delay, certainly not at the asset management company level or fund level. The risk of disclosing proprietary trading information would be quite high," she said.
Public disclosure could even lead to "retaliation" by issuers against short sellers, Marras added.
Treip said the FSA's experience with Britain's disclosure regime has so far not seen concerns such as a breakdown in relationships between issuers and shortsellers materialise.
John Gaine, special counsel to the Managed Funds Association, a global hedge fund lobby, said only aggregate short positions should be disclosed, as in the United States, as public disclosure of individual positions would damage the quality and quantity of market liquidity.
Comporti said CESR was still discussing a common position on naked short selling, whereby shares are sold without borrowing arrangements in place, a practice banned in some EU states.
"Bans are not the way to go," EFAMA's Marras said. (Reporting by Huw Jones, editing by Stephen Nisbet)