Bloomberg News

Taiwan Urges Insurers to Stop Lending Securities for Shorts

November 27, 2011

(Updates index levels in fifth paragraph.)

Nov. 25 (Bloomberg) -- Taiwan’s regulators urged insurers to stop lending securities to short sellers, seeking to bolster equities after the benchmark Taiex Index slumped the most among Asian benchmark gauges this year.

Officials called insurance companies yesterday to remind them such actions may result in the reduction of value of their own stocks, said Lee Jih-Chu, a spokeswoman at the Financial Supervisory Commission, in a phone interview from Taipei today. She denied a Commercial Times report that the regulator had banned four state funds and insurers from securities lending.

“Taiwan is a retail-dominated market, so we hope foreigners won’t use the advantage they have to do things that will be unfair to other investors amid this uncertain market environment,” Lee said. “We told the insurers, look, you may gain some fees from lending but it will reduce the overall value of shares. You have to evaluate the cost effectiveness.”

The FSC is trying to stop investors from profiting from declines in markets at a time when surging borrowing costs in the euro region are stoking concern the region’s debt crisis will derail global economic growth. Short sales are when investors bet on declines in securities by borrowing stock to sell on the expectation they can be purchased at a lower price.

More than $4 trillion has been erased from the value of equities worldwide this month as the MSCI All-Country World Index slumped 10 percent. Taiwan’s Taiex index lost 11 percent, while the MSCI Emerging Markets Index sank 12 percent. The Taiex index lost 1.1 percent as of 11:47 a.m. local time, set for the lowest close since Aug. 27, 2009.

Maximum Shorts

Italian and Spanish financial-market regulators extended in September temporary bans on short selling of financial shares that were introduced the previous month in a bid to stem market volatility. European Union lawmakers backed a proposed short- selling law on Nov. 15 that paves the way for an optional ban on naked credit-default swaps tied to sovereign debt.

Taiwan amended rules to cap the daily maximum short selling of borrowed stocks to 20 percent of the average transaction volume of the past 30 trading days, from a 3 percent limit of outstanding shares per stock, the FSC said in a statement on its website on Nov. 21.

Lee denied the Commercial Times report, saying the regulator respected “the operation of the market mechanism,” Lee said. She said the FSC isn’t in charge of state funds and wasn’t in a position to advise them.

“Foreign investors have been short-selling a lot in Taiwan, so the FSC’s moral persuasion is a bid to improve the market,” said Parker Wu, a fund manager at the Agriculture Bank of Taiwan, who helps oversee the equivalent of $98 million.

Overseas investors sold $10.5 billion Taiwan stocks this year as of yesterday, according to data compiled by Bloomberg. Funds investing in developing-nation stocks withdrew $2.7 billion in the week ended Nov. 23, Citigroup Inc. analysts led by Markus Rosgen wrote in a report today, citing data compiled by EPFR Global.

--Editors: Darren Boey, Richard Frost

To contact the reporter on this story: Weiyi Lim in Singapore at wlim26@bloomberg.net

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net


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