What is happening with short selling regulations in Europe?
Earlier this year, the European Parliament’s regulation on short selling of securities and certain other instruments came into being. With a 1 November 2012 implementation date, this has the industry in a scramble as to what needs be done to meet requirements. The regulation provides that a person may not enter into a short sale of shares or sovereign debt unless that person has: (i) borrowed the shares or sovereign debt; (ii) has entered into an agreement to borrow the shares or sovereign debt; or (iii) has an arrangement with a third party confirming that the shares or sovereign debt have been located.
How has this interested your customers recently?
It is this third option, confirming that shares have been located, that has attracted the most interest as the easiest way to meet requirements in a high-volume trading environment. Anetics has a long history of providing technology for the short-sale locate process going back to the implementation of Regulation SHO in the US almost eight years ago. This technology has been extended to meet new requirements put forth by the European Securities and Markets Authority.
What does it mean to give a locate?
At its core, the process is quite simple. Firstly, a locating broker must have an accurate catalogue of securities that are known to be available to borrow from third-party lenders, or available from within the broker’s own firm and eligible for re-hypothecation to cover a customer short sale. Then from this list, the broker applies certain factors, haircuts and filters to arrive at a quantity of shares that is believed to be readily available to settle any short selling. From that quantity, the broker may grant a locate to one or more customers.
What’s different about doing a locate in Europe versus the US?
The challenge in Europe is that it is not enough just to know that one or more custodial banks or brokers have a certain quantity of shares available to lend, but one must also know where those shares are domiciled. For securities that trade in more than one country, there may be fees, taxes or restrictions that are associated with moving stock from one country to use for settlement in another.
Has there been any movement towards using an easy-borrow list in Europe to obviate the need for a locate?
As in the US, there is the concept of generating an official easy-borrow list for Europe. While still not 100 percent clear as to how one should go about generating and using such a list, we have a good idea. Firstly, we’ve ruled out that one can make a global list for all of Europe, but rather we intend to make country-specific lists. Requirements for easy-borrow status will include a variety of factors such as current trading pattern (derived from price and trading volume over a multi-day period), available shares that are offered for loan, from how many different sources, and the availability trend over a multi-day period.
What does Anetics offer in the way of product that can help with this?
The Anetics Argent platform has tools for managing all of the above. And most importantly, it generates the requisite audit trail documenting who received a locate, when they asked for it, when it was offered or granted, and why (documenting the expected source of supply or reason the locate was given).
How does this system work?
There are four ways a customer may interact with the system. The simple, easy way is through a web-based application, where the customer can enter new locate requests, have access to locates that are already given, see and copy easy-borrow lists, and the like.
To do a new locate request, the customer types (or pastes in) a list of one or more securities with quantity, and the country in which the customer intends to sell such quantity short, and the system will respond with an immediate indication of ‘yes’, ‘no’ or ‘maybe’. The ‘yes’ and ‘no’ responses are tendered where the system can either do an automatic locate that is based on rules that have been configured for this particular customer, or where the system knows based on other general rules that the security will not be eligible for short selling. The ‘maybe’ response puts the request into a pending status, where the locate must actually be acted on by the firm’s stock-loan desk personnel.
This same interaction is supported via three other methods, which are all machine-to-machine. The customer may use FTP (or any of its secure variants) to submit a file listing locate requests. The customer will get a file back with the response. The customer may use Simple Object Access Protocol web services to make locate requests and to check on the status of any pending responses. Or the customer may use Financial Information eXchange (FIX) messaging to submit locate requests, receiving a FIX message back immediately on action.
Since there has been a new trend where some customers must actually pay a fee to the broker to receive a locate, and some locates have pre-borrow requirements or a high cost of borrow necessitating customer approval, the platform supports the concept of a locate being offered, accepted, declined, and yes, even cancelled, including an automatic cancellation if an offered locate is not accepted within a certain period of time. All of this is because locates are offered or given from a limited pool of available supply, and if they are not to used by one customer, they can be reserved for another.
The Argent system is easy to implement. Anetics hosts the platform on behalf of its customers so there is no investment in technology infrastructure by the clearing broker (or broker that may be offering locates). It is available white-labelled so the broker may brand it with a proprietary application name and have it appear as a part of the broker’s own internal tool kit.
← Previous interview
Bank of England
Che Sidanius
Next interview →
BNY Mellon
Robert Chiuch
Image: Shutterstock 
