A Public Debt Management Perspective on Proposals for Restrictions on Short Selling of Sovereign Debt

New restrictions on short-selling sovereign debt need to be supported by concrete evidence that links systematically unrestricted short-selling activities to fraud, abuse or market manipulation. OECD debt managers noted that there is plenty of empirical evidence on the benefits of short selling, including more liquidity, pricing efficiency and better allocated risk. However, solid evidence in the form of empirical data on market instability unambiguously caused by unrestricted short-selling activities (to be counted as ‘costs’) seems to be lacking. Debt managers also noted that the reporting requirements will be costly from a purely administrative point of view. A ban on uncovered short selling transactions of sovereign debt would make risk management more difficult and expensive, with detrimental effects on market efficiency, liquidity and funding costs for sovereigns. Moreover, it is unlikely that such bans would have a stabilising effect in government securities markets during a crisis. Rather than containing the crisis, a ban on short selling of government debt is likely to worsen the situation. The paper concludes that OECD debt managers have a range of tested tools at their disposal for dealing with temporary or chronic dysfunctional measures in sovereign debt markets, ranging from ‘quantity measures’, such as openings, to ‘pricing measures’ such as dynamic fails charges. JEL Classification: E44, G01, G21, G28, E61, H21. Keywords: financial regulation, short-selling, restrictions on short-selling, debt management, risk management, sovereign debt.