ISLA Chief Says EU Regulation Fears Causing Hedge Fund Short-Selling Clampdown

The CEO of the International Securities Lending Association Kevin McNulty warned that hedge funds are abandoning short-selling because of uncertainty over looming European Union regulations.

(June 14, 2011) -- Kevin McNulty, the CEO of the International Securities Lending Association (ISLA), claimed in a June 14 press conference that fears over imminent European Union regulations are causing hedge funds to shun short-selling.

Hedge funds are fearful, he said, that new EU regulations will require them to disclose their short positions publicly and possibly even allow authorities to ban the practice entirely.

The International Securities Lending Association represents banks, pension funds, insurance companies, and agents that either lend out securities or facilitate the activity.

"Hedge funds like to have a level of certainty on their ability to execute and live with a trade for some time," McNulty said. "Short-selling is good for markets while artificially stopping short-selling is a bad thing.” He stressed that short sellers have more than halved borrowing, from $4 trillion before the recession to around $1.8 trillion now.

While most economists have long concluded that short-selling is a net positive for markets, it has emerged as a frequent scapegoat after the recent financial crisis, Dow Jones Newswires reported.

Concern over EU regulations is not unique to hedge funds. A recent survey by Pension Fund Barometer found that heightened regulation was the second greatest worry among UK pension fund managers, right after the threat of inflation.