Published September 27, 2008

SGX will not penalise naked shorts caused by 'honest mistakes'

By LYNETTE KHOO
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BROKERS and their clients can heave a sigh of relief because honest mistakes will not suffer the hefty fines imposed on failed shares delivery. To soothe anxiety among trading representatives (TRs) here, the Singapore Exchange (SGX) clarified yesterday that it may not penalise naked shorts caused by error trades or other honest mistakes. It will consider appeals from brokers to waive penalties.

The moves followed an outcry among TRs at what they see as a high price for error trades - caused by pressing the wrong key. Failure to deliver shares by the settlement date constitutes a failed trade.

Starting Thursday, SGX imposed a penalty of 5 per cent of the value of a failed trade subject to a minimum of $1,000, on top of the current processing fee of $30 per contract. A broker who fails to deliver the shares in the buying-in market may also be liable to a penalty of $50,000 and/or barred from participating in the buying-in market.

The penalty is to be paid within five business days of notification. But SGX clarified that there are provisions to appeal against penalties. While a decision on an appeal is pending, the dealer does not have to pay a fine. The result of the appeal will be known within 10 business days of the date of notification. 'We will consider factors such as the intent of the investor who opens the sale, profile of the investor and trades, and whether the trade has any potential adverse impact on the integrity of the settlement system,' said SGX head of markets Gan Seow Ann.

The fines will go towards investor education initiatives.



Mr Gan also said that the primary intent of the new rules is not to curb short-selling per se but to deter failed share delivery - which threatens to compromise the settlement system. 'It was never meant to be a response similar to what you see in other environments, where regulators have banned short-selling,' he said, though it was easy to make such an association as the measures came just after regulators imposed short-selling curbs elsewhere. Mr Gan stressed that the measures are largely pre-emptive. 'Despite the market turbulence and all these uncertainties, trading continues to be orderly and there was no pressure on the system as far as settlement is concerned.'

On the Hong Kong bourse, naked short-selling is illegal and subject to jail terms and/or fines. The Hong Kong stock exchange (HKEx) said yesterday it also plans to increase the penalty fee for securities settlement failure.

Mr Gan said on a separate matter that SGX is looking at providing more disclosure on covered short-selling - borrowing scrip to short-sell - and is talking with brokers to work out the information available for disclosure. But SGX hopes to publish a list that is more expansive than the summary report by HKEx on borrowed scrip twice a day, which currently does not capture naked short positions that are covered intraday, he added.