The International Organization of Securities Commissions has published its final principles to guide securities regulators in their regulation of short selling.

IOSCO’s Technical Committee has published a final report setting out four high level principles for the effective regulation of short selling. It recommends that short selling should be subject to: appropriate controls to minimize the potential market stability risks; a timely reporting regime; and an effective compliance and enforcement system. It also stresses that short-selling regulation should allow exceptions for certain types of transactions for efficient market functioning. Additionally, the report outlines the minimum that regulators should do in order to support each of the four principles.

“IOSCO believes that the adoption of these four principles by securities regulators will contribute to the development of a more consistent global approach to the regulation of short selling,” said Kathleen Casey, chairwoman of the Technical Committee.

“The principles strike a balance between maintaining the benefits that short selling contributes to the functioning of markets while ensuring that regulators have the necessary tools to counteract the abusive use of short selling,” she added.

The principles were developed by the Task Force on Short Selling, which was created in November 2008 in response to concerns regarding the impact short selling was having in the extreme market conditions. It aims to eliminate gaps between the different regulatory approaches to naked short selling, while minimizing any adverse impact on legitimate activities, such as securities lending and hedging, which are critical to capital formation and reducing market volatility, IOSCO said.