Brokers Are Equally Confuse With Short-Selling Procedures

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Dec 26 2006
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Do you understand the rules pertaining to the soon to be available short-selling of 70 stocks identified by Bursa Malaysia (Kuala Lumpur Stock Exchange) announced (after several postponements) recently? Frankly, I DON’T and neither do my broker (there were “Errr …”, “I think …”, “Actually …”, “Hmm …” etc when I asked my broker today).
Below are some information from Business Times, which I would categorize as generic info:

(1) What are Approved Securities for RSS?

  • The Approved Securities for the re-introduction of RSS consists of 70 stocks on the main board based on the criteria set. Goto here to refer the 70 stocks identified: Stocks You Need To Know For Short-Selling

(2) Will this list of Approved Securities change?

  • Yes, the list of Approved Securities will be reviewed approximately every six months i.e. June and December.

(3) What are the criteria for the selection of RSS Approved Securities?

  • Securities which must satisfy all the following criteria:
    ** Average daily market capitalization of more than RM500 million for the past three months;
    ** At least 50 million shares in public float;
    ** Average monthly volume traded of more than 1 million units for the past 12 calendar months.
    ** However, Bursa may not declare a securities as Approved Securities notwithstanding that it fulfills the criteria above.
(4) What are the new features of RSS?
  • Feature-1: The Up-tick Rule whereby RSS orders can only be keyed in at a price greater than the last traded price
  • Feature-2: RSS orders must be executed through designated RSS Trading Accounts
  • Feature-3: Gross short transactions are limited to 10 per cent of the total number of listed shares of a particular Approved Securities.
  • Why set the 10 percent limit? I understand the reason behind this but it should be un-limited if the exchange is serious about making this short-selling a mature instrument in the market.
(5) What happens when the 10 per cent limit is reached?
  • RSS activities for a particular Approved Security for RSS will be suspended for four market days from the day the limit is reached. Normal trades for the particular security will continue.
  • It must be joking on this – do you think the market will collapse with the limited 10% shares being shorted at the first place? If the speculators indeed have intention to pull their investment out, a combination of selling their portfolio and consistently short the index-linked counters one after another will do the trick. Let’s get real.

(6) What happens to orders already entered prior to the above suspension?

  • Orders already entered will be matched in full unless withdrawn by the broker. The 10 per cent limit is a trigger point to commence action to suspend RSS activities.

(7) What do investors need to do if they are interested to short-sell any of the RSS Approved Securities?

  • Investors interested to short-sell any of the RSS Approved Securities would need to open a designated RSS trading account with their brokers.
  • All trades have to be executed via this designated RSS trading account.
  • Before any short-selling orders can be executed, investors must provide a confirmation to the broker:
    (i) that they are not an associate pursuant to section 3 of the Securities Industry act 1983, and
    (ii) that they have borrowed the RSS Approved Securities or have procured confirmation from an Authorized SBL Participant that RSS Approved Securities are available for borrowing.
  • How do you go about borrow these shares for short? Do I have to pay any fees to borrow this shares? How much do I have to pay then? My broker is confuse and not sure himself about this part, to him there’s only one word – TROUBLESOME.

(8) Participating Organizations (POs) have the obligation to obtain confirmation from the client as stated under the previous question. Would a verbal confirmation be sufficient?

  • Yes, verbal confirmation is permitted provided that the verbal confirmation is taped. Therefore, if a Participating Organization allows verbal confirmation, it must put in place phone taping system to record such verbal confirmation.

(9) Can an investor borrow securities and do RSS at different POs?

  • No

(10) Will the RSS screen accept a sell order using a non-RSS trading account?

  • No

(11) Are purchases allowed in an RSS Trading Account?

  • Yes, purchases are allowed in an RSS trading account
    provided it is executed after the execution of any RSS of an approved securities for the following purposes:
    (i) For a contra either in full or partially, the RSS trade provided such a contra is executed on the same market day of the RSS of an approved security;
    (ii) For the return of the borrowed securities
  • Purchases shall not exceed the total amount of net short positions of the approved securities on a market day

(12) Can a client sell overbought securities in the RSS account?

  • Yes, provided the overbought position of the securities arose from a mistake and the sale is subsequently reported by the Executive Director Dealing to the Exchange with explanation on how the mistake arose.

# TIP: If you understand the complete procedure of the short-selling, I would appreciate very much if you can share/comment your knowledge here.

# TIP: I would rather wait to see how the authorities will solve problem(s) which might arise from this new short-selling instrument. I just hope more information can be published for investors’ digestion – talk about getting Malaysia Stock Exchange on the global presence.

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