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Capital Markets

Japanese FSA tightens rules on shorting

Delayed rule equivalent to US’s Reg M; Sources say insider trading the real issue

Japan is set to introduce a long-expected ban on the shorting of stocks immediately before new issuances. The rules, which are expected to mirror Regulation M in the US, will prevent investors that are shorting a stock from subscribing to a new issue from the company involved. The move is intended to prevent investors shorting a new issuance that is expected to be dilutative, see the price of the stock fall when the new shares are issued and then fill their short positions with the new shares before exiting the trade at a profit.

The practice, which is not illegal under present Japanese law, takes advantage of the gap between the announcement of an offering and the final pricing and can cause big additional declines in a stock’s value. This is different from shorting a stock before a deal’s launch, which would imply inside knowledge.

Market participants say that Japan’s Financial Services Authority has been investigating four deals in particular: recent offerings by Tepco, Sotetsu, Nippon Sheet Glass and Impex. In each of the deals, the stocks appeared to trade unusually before equity offerings that subsequently underperformed. The regulator has been discussing the new regulation since the middle of 2010 and market sources initially expected it to be in place by the start of this year.

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