Acceptable conduct in relation to Stock Borrowing and Repo Markets

United Kingdom
Stockborrowing is the process whereby one party "borrows" securities from another party for a period and provides that other party with collateral in the meantime. A repo is a "repurchase agreement" whereby one party agrees to sell stock under an agreement and to repurchase it at a later date.

Last year, the then Chancellor announced his intention to extend stamp duty relief to stock borrowing and repo transactions in UK equities conducted on-exchange. He received advice from the SIB on the regulatory implications of this proposal, the main thrust of which was that stock borrowing did not require regulation, but that there should be some standards of market conduct in place to ensure that potentially abusive activities were prevented. The SIB also asked for advice from the Market Conduct Group and on 24th October it issued a press release stating that it accepted the advice which the Group had given.

The advice was in step with the Government's intention to liberalise the stock borrowing market, allied with a need to keep on top of potentially abusive practices. The Group concluded:

  • Stock borrowing can be beneficial to the trading process and thus contribute to market efficiency. However, it is essential that the stock borrowing practice does not distort the market itself.

  • It is possible to employ stock borrowing to restrict the supply of a stock in order to manipulate its price. The Group thinks that the regulators should keep this possibility in mind, and the creation of rules to combat it under review.

  • Stock borrowing may be used by firms seeking to profit from on-lending. If this on-lending does not take place reasonably quickly, the Group expects regulators to take an interest in why a firm was continuing to hold stock, and whether it had changed its on-lending policies so as to secure an improper benefit.

  • Short selling is an acceptable feature of the market and one which can usually benefit it by adding to its liquidity. However, regulators should be aware of the possibility that short selling might create a disorderly market.

Whilst accepting the above advice, the (now) FSA has said that it will keep the developing market under review, and address the question of formal action or rules in the light of these developments.