US securities regulators have modified an emergency rule aimed at curbing manipulative short-selling in 19 major financial firms including Fannie Mae and Freddie Mac. Facing complaints from financial industry groups and exchanges, the Securities and Exchange Commission said on Friday it was granting certain market makers relief to help maintain order and liquidity in the markets.
The market makers affected would not have to pre-borrow shares before shorting the stocks, the SEC said. The emergency rule, which takes effect on Monday and can last up to 30 days, requires a short seller to borrow the securities before executing the sale. It also requires the investor to deliver the securities on the settlement date.
The rule applies only to the stocks of 17 Wall Street firms, primary dealers that have access to the Federal Reserve's discount window, such as Citigroup Inc and Lehman Brothers. The SEC also included the biggest mortgage finance companies, Fannie and Freddie, after a week when their shares dived on concerns they were undercapitalised. Wall Street, which was thrown off guard when the SEC announced the emergency rule on Tuesday, quickly applauded the rule modifications and guidance.
"The guidance is essential for separating legitimate market makers from those who may try to act illegally," said Ira Hammerman, senior managing director of the Securities Industry and Financial Markets Association.
The Philadelphia Stock Exchange, whose acquisition by Nasdaq OMX Group is expected to close within days, said the market maker exemption was "absolutely necessary for the liquidity providers that make markets on our options exchange." The SEC said broker dealers did not have to change their processes and procedures used to document compliance with the share borrowing requirement. However, broker-dealers must still document those arrangements.
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