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April 2015

Short Selling or shorting has often been a bad word for its critics as it essentially works on sell-high, buy-low principle and triggering market volatility. However, it has its own advantages and is critical for the overall market development. In the UAE short selling is allowed in a much regulated manner

Short selling – the sale of a security that the seller does not own – is one of the market practices in many securities market around the world. In the UAE, the market regulator Emirates Securities and Commodities Authority (SCA) defines short selling as “the sale of borrowed securities or securities not owned by the seller” and reserved the practice for market makers, in addition to other cases approved by SCA.

The regulator in December last year stated that, “The technical regulations and trading mechanisms of the UAE financial markets do not permit, or support, short-selling practices up to this point, unless done in accordance with the SCA Board Decision No (48) concerning the Regulations as to Short-Selling of Securities.”

The Mechanics

The concept of short-selling can take any one of the following forms in UAE:

  • The selling of borrowed securities in the hope of repurchasing them in the future at a lower price and returning them back to the lender at settlement date
  • The selling of securities not owned by the seller, buying them back from the market—by delivery date—and delivering them to the buyer,
  • Borrowing them from another and delivering them to the buyer and then purchasing them for the lender.

Short selling is undertaken to generate profit from the difference in the purchase price and the selling price as short sellers expect a drop in the price of shares after the selling, and subsequently repurchase them for less than the selling price. However, if the price of shares in question surge contrary to sellers’ expectation, short sellers would incur losses.

Highly Regulated

The SCA has clearly stated that regulated short-selling practices are only reserved for market makers, and that it has not issued approvals to any local bodies to practice short-selling. The securities market determines the securities that are allowed for short selling in accordance with the standards set by the market and approved by the regulator. Securities may only be short-sold after one month from listing in the market. Short selling may not be used for a security that is subject to the rights of subscription in capital increase shares or in covered warrants.

The SCA may temporarily or permanently suspend short selling for some or all securities in the event of exceptional circumstances that may be detrimental to the market, such as sharp fluctuations in the prices. Short selling will be be stopped on the same day and the next business day for securities that fall 5% or more in one trading day and no more than (10%) of the closing price of the previous day.

Dealers’ Obligations

As per the regulations, the broker can execute short selling transactions only after ensuring his client’s ability to deliver the securities which he wants to short-sell by the settlement date. The broker is not to provide a total or partial guarantee for securities borrowed by his client to settle a short- selling transaction.

Besides, the broker is not to short-sell securities unless the price of the order is higher than the price of the last executed transaction. Additionally, short selling is not to be used in order to prejudice the fairness and integrity of the market. And lastly, securities short selling orders must be entered at a specific price.

Summing up, the votaries of short selling consider it as a desirable and an essential feature of a securities market. The critics of short selling on the other hand are convinced that short selling, directly or indirectly, poses potential risks and can easily destabilise the market.

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