Short selling consistency in South Africa

This chapter explores various environmental and regulatory factors that differentiated short selling activity in South Africa from global counterparts both prior to and during the Global Financial Crises. Throughout the global financial crisis, South Africa managed to maintain a consistent approach to short selling activity, thus minimizing trading disruption. This is largely attributed to a strong regulatory framework, as well as the rules, risk management systems, and surveillance capabilities of the Johannesburg Stock Exchange (JSE). The regulations included prohibition of naked short selling, with regulated covered short selling permitted. The rules regarding short selling are determined by the JSE in consultation with the regulator, the Financial Services Board (FSB). The 68% fall in equities derivative volumes in 2008-2009 has been ascribed by the JSE to a number of issues, including lack of investor confidence, particularly retail investors; the exit of Lehman Brothers as a major player in the JSE's equity derivatives market; and the increase in clearing margins by clearing members, particularly on small cap stocks. A key reason provided by the JSE for the decision to maintain the status quo was the exchange's surveillance and risk management systems, which enable surveillance teams to see trades to beneficial holder level and to enforce the requirement for traders to cover short positions. The decision not to change short selling rules was also a vote of confidence by the FSA in the banking industry. South African banks were not as vulnerable to short selling activity as global counterparts, with South African banks remaining profitable and well capitalized during the GFC, with little exposure to subprime mortgages.