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Short-sales: Rules and safeguards

MOST investors entering the Singapore stock market for the first time do so to buy securities as part of their investment strategy. Investors holding a bearish view of the market may, however, consider selling securities short in order to buy them back at lower prices.

Before an investor considers short-selling securities, he needs to be aware of the rules governing such activities to protect shareholders and other market participants and to ensure that the market remains fair, orderly and transparent.

Each time an investor puts through a sell order via a member firm (commonly referred to as a broker firm), the investor must indicate if the order is a short-sell.

Data on these "marked" short-sell orders are aggregated and reported daily on the SGX website. It is important to note that the data is at a gross level; if a short-sell order is transacted and then securities are bought back later to cover the short, this covering of the short-sell order is not considered in the report.

Aggregated short-sell positions are also reported to the Monetary Authority of Singapore (MAS).

An investor must aggregate all his short positions, including all positions held through nominee accounts.

Persons whose aggregate short positions are below the thresholds of 0.2 per cent of total issued shares or S$2 million in aggregate value need not make any short position report. This exclusion does not exempt them from the requirement to mark short-sell orders as and when these are made. The information on short-sell positions reported to MAS is found on its website.

Other regulatory safeguards include the penalty on naked short-sales which are not covered within two business days of transaction, and the forced buying-in of these securities at the expense of the participant responsible for the short positions.

SGX will impose on the short-seller punitive cash settlement amounts designed to disgorge the short-seller's profits at a minimum, if the failure to deliver is not rectified.

For an investor to safely short-sell a security without risk of paying any penalty for failure to deliver the security, the investor should borrow the security prior to short-selling it.

The Central Depository offers a securities borrowing service across a wide range of securities through registered borrowers. Details are found on the SGX website.

Investors should also be aware that circuit breakers operate during continuous trading in the market to slow sharp price moves for most securities priced at more than S$0.50 and all Straits Times and MSCI Singapore index component stocks.

The circuit breakers are activated when an incoming order could potentially match an existing order outside the circuit breaker price bands, which are 10 per cent above and below the dynamic reference price.

When a circuit breaker is triggered, a five-minute cooling-off period will follow during which trading can only take place within the price bands.

SGX also addresses the risks of price dislocation during opening auction routines by reviewing trades which result in price movements of beyond 30 per cent from the previous close.

Short-sellers should therefore be aware of these and other rules and tools that aim to ensure a well-functioning market.

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