Is Short Selling Legal in Bangladesh
“Stripping is often cited by struggling SOEs as the source of their problems. However, there have been relatively few cases of naked short selling. However, more recently, on May 19, 2021, the SEC charged a broker-dealer (“BD”) with violating the provisions of the SHO Regulation.1 The SHO Regulation regulates short selling of securities and is broadly aimed at minimizing naked short selling, delivery defaults, and other practices. According to the SEC`s complaint, “a sale occurs when an investor borrows a security and sells it on the open market and plans to buy it back later for less money.” 2 This is how short sellers benefit from a fall in the price of a security. This contrasts with “long” investors, who benefit from a rise in the price of a security. Short selling is very risky: the losses are unlimited because the price of a security can always increase. An archive photo shows the front view of the Bangladesh Securities and Exchange Commission building in the capital. The Black Sea Economic Cooperation Organization has developed rules on short selling of shares to legalize issuance on the country`s capital market, with the aim of launching new products such as derivatives and sukuk. — Rule 203(b)(1) of the SHO Regulation requires BDs to “locate” securities sold before proceeding with a short sale.4 This “localization requirement” means that BDs (a) must borrow the securities; (b) enter into a bona fide agreement to consolidate the securities; or (c) have reasonable grounds to believe that the security can be borrowed so that it can be delivered on the due date of delivery. Investors cannot be prevented from buying Class A, B, G and N shares by selling junk shares on the same day, although the rules do not allow this, he added. Short selling occurs when an investor borrows a security and sells it on the open market, with a plan to buy it back later for less money. “We cannot restrict short selling when a client trades on both exchanges because the exchanges are not connected,” said an official at a stockbroker that is a subsidiary of a state-owned bank.
The Bangladesh Securities Commission has developed rules on short selling of shares to legalize issuance in the country`s capital market, with the aim of launching new products such as derivatives and sukuk. Short selling is a transaction in which the seller does not actually own the shares sold, but borrows them from the broker-dealer through whom he places the sell order. BD has not yet clarified its position, but it denies the SEC`s complaint. The SEC is seeking an injunction, $1.6 million in fees and civil penalties. The unequivocal message to BDs is to strictly adhere to SHO regulations and watch out for possible red flags. The message in the public markets is that naked short selling can actually be a practice to drive down the price of an issuer`s shares. This will be an interesting case to watch. Stripped selling is the illegal short selling of shares that have not been borrowed or located. When sellers engage in naked short selling, the volume of shares may be greater than the tradable shares in the market, which may prevent sellers from delivering the securities sold on the settlement date. According to the complaint, BD incorrectly labeled 96 percent of a particular hedge fund`s short orders for shares of two separate issuers, totaling more than $250 million, as “long” or “short-exempt.” This labelling error would have generated $1.6 million in brokerage fees for BD. As a result of the mislabeling, the hedge fund was able to short sell the securities, even though it already had a short position in the securities and did not lend or locate additional shares to short sell them.
Despite these and other warning signs, BD allegedly continued to mark hedge fund orders as “long” and “short exempt” without taking appropriate steps to determine whether these order marks were accurate. BD also failed to borrow or locate the shares before engaging in short selling. The OHS regulations, published in 2005, established “location” and “fence” requirements.