Naked short on understanding

The ongoing failure to clearly define covered and uncovered (or naked) short selling continues apace.

Just last month, as reported here, at the Clearstream Global Securities Financing Summit 2011, audience members were asked to choose between four definitions of naked shorting – there was no clear winner.

Now, a press release from the European Parliament which outlines an interview with French Green MEP Pascal Canfin has further muddied the waters.

Canfin is well known for his report on short selling and CDS, released last year and discussed by the Economic Affairs Committee in January.

However, this new press release has already caused confusion among the media – I’ve seen one headline based on it already saying that Canfin wants to “ban short selling”. Of course, later in the article there is the caveat that he is talking about naked short selling, not short selling, but given people often stop reading at the headline this is hardly informative.

Of course, the media is hardly helped by the language in the press release itself, which feints between different definitions.

For instance: “Particular problems can arise with ‘naked’ short selling and CDS, which involve selling shares you don't own...” and then just a couple of sentences later: “For example, when the US financial system wobbled and everyone expected an implosion, they rushed to sell bank shares. Naked short sellers borrowed shares and dumped them on the market leading to large price drops, fostering instability and contagion.”

All of a sudden naked short sellers are borrowing shares in advance of selling them, which is a definition of naked shorting I certainly haven’t heard yet.

Canfin’s original report also flits between “naked” and “uncovered” as descriptions for the practice, with no clear glossary to be found.

Perhaps before introducing any other legislation, the EU should come up with a binding agreement on exactly what naked short selling is and what it isn’t – then the debate can really move forward.