Bursa faces challenges in RSS - regulated short selling

Bursa faces challenges in RSS
Business & Markets 2013
Written by Fatin Rasyiqah Mustaza & Kathy Fong of theedgemalaysia.com
Tuesday, 17 September 2013 10:37

KUALA LUMPUR: Bursa Malaysia is facing an uphill task to promote regulated short selling (RSS), which many investors perceive as a market dampener.

“RSS is dependent on securities borrowing and lending (SBL). The biggest challenge is to get more lenders to participate in SBL, especially domestic fund managers who are managing large amount of securities,” said a Bursa Malaysia spokesman.

“We think there is still a lack of awareness among domestic fund managers on the benefits of securities lending,” she told The Edge Financial Daily.

For RSS, investors need to borrow scripts before they execute short selling. Naked short selling, which is short selling without borrowed scripts, is generally not permitted on Bursa.

Only licensed proprietary traders, fewer than 80 of them on the stock exchange, can execute short selling without borrowing the securities; however, they are required to cover their short positions within the same trading day.

Bursa will engage institutional fund managers to participate in RSS and SBL in order to increase the number of lenders in the lending pool and the number of securities available for lending.

The spokesman said securities lending could be an income source for institutional funds as fees are charged for lending securities. “Ultimately, the investors of the fund will benefit from securities lending in the form of better fund performance.”

Two months ago, Bursa expanded the number of approved securities for short selling to 171 from 100.

In June when the benchmark FBM KLCI was trading at above the 1,750-level, short selling on Bursa soared to a monthly record of RM293 million from almost zero in March last year. RSS trades had not surpassed RM100 million between January 2012 and May 2013, except in April this year when it went up to RM127 million.

The total value of borrowing and lending ballooned to RM640million in June.

However, local fund managers, who are holding a large number of scripts, were not excited with script lending as many believe the risk and returns are not in proportion.

“I will earn a few percentage points of fee by lending out some of the shares in the portfolio. But if the market trend turns against me and share prices fall, I could be caught in a situation in which I don’t have the shares in hand to sell and take profit,” said a fund manager with an insurance firm.

“In that case, the fee I earn from script lending may be too little to offset the losses in my portfolio. It is not worth taking the risk,” he said.

Furthermore, short selling and script lending are not allowed under the mandates of most investment funds. Hence, SBL is certainly something that will not be considered by many asset managers.

Some stockbrokers pointed out that government-linked investment funds, for instance, the Employees Provident Fund and Permodalan Nasional Bhd, could be a good source for script lending as they hold relatively high shareholdings in many listed entities on Bursa.

That said, the investment mandate to allow script lending could also be another issue of concern because such activities may pull down share prices of counters that the funds are holding in their portfolios, said some stockbrokers.

Phillip Capital Management Sdn Bhd chief investment officer Ang Kok Heng said there is always a concern that the market would become more volatile as a result of excessive RSS.

In his view, excessive RSS would swing the market or an individual stock down sharply and that is likely to press the panic selling button.

“People would short sell because of the company’s fundamentals or when the stock is overvalued. It could also be because of possible negative information one would have on a company ahead of other people,” said Ang.

A recent example is food producer China Minzhong Food. It became the first Singapore-listed Chinese firm to come under attack by a short seller, which wiped off more than half its market value in two hours and triggered a trading halt on the Singapore Exchange on Aug 26.

China Minzhong was hit by fierce short selling after California-based Glaucus Research issued a report alleging the company had misled investors about sales to its biggest customers.

Bursa’s stepping up efforts to promote RSS is seen as a move to boost trading volume.

Nonetheless, some quarters, including stockbrokers, raise the question whether there is sufficient liquidity in the market for RSS.

A fund manager commented that Malaysia’s stock market is not as matured as a developed market’s. “It would create a negative sentiment and would magnify selling force. You would see a downside selling pressure in the market,” he said.

Is RSS good or bad for the stock market? Some believe RSS can help to cap share prices on excessively overvalued stocks, hence curbing speculative interest that propels share prices to rocket upwards. Others argue that RSS would aggravate panic selling in a bear market. This has been a debate in the financial market for decades.

As such, it is not a surprise that Bursa is finding difficulty in getting more lenders to participate in SBL, especially domestic fund managers who are managing large amounts of securities.

“These efforts will take time to materialise. As knowledge builds, so would the number of lenders and participation in the RSS and SBL,” the Bursa spokesman said.


This article first appeared in The Edge Financial Daily, on September 17, 2013.