Malaysia may relook short selling

Regulated short selling, together with stocks lending and borrowing, were reintroduced in the country early last year after a nine-year ban. But there have been almost no trades at all as investors blamed the structure as being too cumbersome and expensive.

"We are in the midst of looking at it and when we have come out with something, it will be announced," Zarinah said here yesterday.

"We will continue to enhance the framework because we don't want to introduce a mechanism or facility that people cannot use. We will continue to refine it, but in a prudent manner considering what's happening in the world today, so that the tool becomes useful and can be used in a manner that it is intended to be used," she said.

Zarinah was speaking to Malaysian reporters on the sidelines of a capital market forum organised by the SC and the Securities and Exchange Board of India aimed at boosting linkages between the two markets.

Despite heated debates on the merits of short selling in developed markets lately, and as countries including Australia mull a permanent ban on naked short selling, she said Malaysia will not ban it because there are sufficient controls in place to ensure the facility will not be abused.

"Short selling itself is a tool for hedging and risk management. It is very important that the market, or regulator, ensures that there are hedging tools and risk management mechanism available in the market," she said.

It is when people abuse the mechanism that problems will occur, Zarinah said.

"We have never allowed naked short selling. We do not need to impose such a ban because our short selling facility comes with many restrictions: there's no naked short sell, it has to be accompanied by stock borrowing and lending facilities," she said.

Stock borrowing and lending are also controlled to a certain extent because it can only happen through a central lending agency, a role played by stock market operator Bursa Malaysia. Only the 100 largest and most liquid stocks are allowed to be short sold and there is an uptick rule, she added.

"So, there are a lot of checks and control mechanism in place already, such that we did not have to impose a ban on short selling when other jurisdictions moved to impose the ban," Zarinah said.

In short selling, investors sell borrowed shares, expecting that the shares will fall in value so that they can buy them back at a lower price, return the shares and pocket the difference as profit.

But since its reintroduction last year, there has been few takers. Fund managers said Malaysia's mechanism is tedious and the fees for borrowing stocks are not cheap.

As opposed to the over-the-counter model adopted by some other countries where interested investors need only to borrow the shares script directly from another broker, here, Bursa Malaysia is involved as the Central Lending Agent.

"That's the reason why we are looking at it. We are aware of the feedback. But as you know, we have been very cautious. There's no need to apologise for being cautious and we cannot apologise for being stringent with regulations," Zarinah said.

"Regulation is key to ensuring a sustainable fundamentally sound market that is capable of withstanding that kind of crisis that we see in the world today," she said.