Business

Thursday March 12, 2009

US reviews short-selling and MTM rules

By C.S. TAN


PETALING JAYA: The Obama administration and the newly-elected US Senate will be reviewing short-selling and mark-to-market (MTM) rules which were widely viewed as having caused US stocks to experience their sharpest descent in several decades.

A sub-committee of the House Financial Services Committee will hold a hearing on MTM rules in Washington today. The Securities and Exchange Commission’s (SEC) chief accountant and the Financial Accounting Standards Board’s chairman will testify at the hearing.

In addition, the SEC may consider proposing re-instatement of the up-tick rule which would restrain short-selling of shares to some extent, House Financial Services Committtee chairman Barney Frank said, according to reports.

Frank said this after a meeting with SEC chairwoman Mary Schapiro who is newly appointed by President Barack Obama.

MTM or fair accounting rules set by the authorities came into force after the financial collapse of Enron several years ago. Enron had marked to market its huge derivative contracts using its own assumptions, and in a departure from the historical cost accounting convention.

Changes to short-selling or MTM rules in the US could have an effect on share prices there, and in turn, affect other markets.

In the last one year, MTM rules caused banks to report billions of dollars of losses in asset write-downs. There is a divide in this debate, with some fund managers advocating MTM rules for transparency while critics said bank losses may have been exaggerated by the rules.

Kumpulan Sentiasa Cemerlang Sdn Bhd’s research director and partner Choong Khuat Hock said: “We need mark-to-market rules, otherwise you could be valuing your securities on your own rules. For illiquid assets, some other valuation methods could be used.”

Federal Reserve chairman Ben Bernanke said yesterday that determining valuation methods for illiquid assets could be very difficult. Speaking to the Council on Foreign Relations, he said “further review” of the current MTM rules would be useful.

Reuters reported on Tuesday the SEC was not planning to suspend MTM rules.

The up-tick rule in short-selling was removed by the SEC, under the previous administration, in July 2007. Critics said that decision led to massive short-selling, causing share prices to fall far more rapidly and further than would otherwise have been the case.

The up-tick rule requires that speculators can only short sell shares at a price a tick above the last done price.

Choong said speculators could still short-sell even if the up-tick rule were reinstated but it’s a restraint. At a time of extreme volatility, he believes the authorities should not have removed the rule. By doing that, they could cause more volatility. However, the up-tick rule can be removed when markets are calmer.

The experience of British banks this year seems to lend credence that short-selling can cause share prices to plunge. Days before the ban on short-selling financial stocks was lifted on Jan 16, bank stocks started to plummet.

The price of Royal Bank of Scotland (RBS), for instance, followed this pattern, falling a further 13% on the day the ban was lifted.


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