By Yakubu LAAH InvestAdvocate
Lagos (INVESTADVOCATE)-The Nigerian Stock Exchange (NSE) on Friday alerted dealing member firms on its strict prohibition of naked short selling, responsibilities and limitation of liability of the Exchange.
This is contained in a circular dated February 12, 2015 with reference number NSE/LARD/BDR/CIR4/15/02/12 and signed by Olufemi Shobanjo, head, broker dealer regulation at the NSE.
According to the Exchange, the reminder is in pursuant to its earlier circular dated September 17, 2012 with reference BDR/CIR/96/DK/09/12on operational guide for market making, securities lending and short selling, “this is to remind all dealing member firms that naked short selling is strictly prohibited,” the NSE warned.
The NSE says involvement in naked short selling is a violation of the rules and regulations governing dealing members (Amendments and Additions – Part III).
Penalties for naked short selling the NSE affirmed are that any dealing member that engages in naked short selling shall be liable to pay a fine of ten percent (10%) of the total transaction value and any benefit accruing from such transaction shall be paid to it.
Any dealing member involved in naked short selling more than once over a period of one (1) year shall be classified as a “serial offender”. “A serial offender will be suspended from trading for a period to be determined by the Exchange,” the circular added.
Naked short selling is the practice of selling securities which the seller does not own, and has not made arrangements to borrow such securities and when the seller does not obtain the shares within the required time frame, the result is known as a “failure to deliver“.
The transaction generally remains open until the shares are acquired by the seller, or the seller’s broker settles the trade. Short selling is used to anticipate a price fall, but exposes the seller to the risk of a price rise, according to Wikipedia.
Similarly, the NSE alerted the dealing members of the rules and regulations which spelt out their responsibilities and limitation of liability to the Exchange.
On dealing members liability to the NSE, they are reminded that Article 80 says the Exchange shall provide its services on a best effort basis and shall not be liable for failure of the system or for any loss, damages, or other costs arising in any way on the following: telecom network or system failures including failure of ancillary or associated systems, or fluctuation of power, or other environmental conditions.
Other dealing members limitation of liability to the NSE include accident, transportation, neglect, misuse, errors, frauds of the dealing member or its authorised persons or the agents or any third party.
In the same vein, the NSE shall not be liable to any fault in any attachments or associated equipment (either supplied by the Exchange or approved by it) which forms or does not form part of the dealing member installation and liability to natural disaster, fire, war or violence, or any other similar occurrence.
On the part of responsibility of dealing members Article 82, the NSE says a dealing member firm shall be fully responsible for all matters arising from access to the trading engine through its Trader Identification Code and Password.
While Article 89 on indemnification of the NSE says every dealing member shall indemnify the Exchange against losses arising from Stockbroking activities.
