This content is from: Local Insights

Japan's short-sale amendments in force

Takashi Itokawa
On November 5 2013, the cabinet order and accompanying regulations amending Japanese short-sale regulations came into force. The amendments consist of three main points: (i) relaxation of the uptick price rule; (ii) confirmation of the reporting and disclosure obligations concerning short-sale positions; and (iii) confirmation of the prohibition of so-called naked short sales.

Relaxation of the uptick price rule

Previously, conducting short sales on a Japanese stock exchange at a price equal to or lower than the market price was prohibited. Following the introduction of the amendments, this uptick price rule will only apply if the price of the relevant stock should decline by 10% or more from the closing price of the preceding business day. This rule is applicable for the period from the day such a decline occurs through to the close of trading the following business day. The amended uptick price rule will also apply to short sales conducted through the proprietary trading systems (such as after-hours stock trading systems provided by certain securities brokers).

Revising the uptick price rule to only prohibit those transactions where the subject stock has suffered a significant drop in price should encourage more activity in the market. While it is anticipated that this loosening of the short-sale restrictions will encourage investor activity on the Japanese stock markets and, in particular, foreign investors, there is a concern that it may result in dramatic price fluctuations due to the increased activity of market speculators.

Reporting and disclosure obligations

The reporting and disclosure obligations temporarily adopted in 2008 have, subject to certain minor changes, been made permanent by the amendments.

The amendments have confirmed that a party assuming a short position with respect to listed stock must make certain reporting and disclosure obligations. Notably, the regulations now state that any party that assumes a short-sale position of 0.2% or more of the outstanding stock of that issue, must file a report with the relevant Japanese stock exchange via the relevant broker. Further, where the short-sale position exceeds 0.5% of the outstanding stock of that issue, such report will be disclosed to the public by the relevant Japanese exchange. Formerly, such reporting and disclosure requirements, both to the relevant exchange and public, were triggered upon a party assuming a short-sale position of 0.25% or more of the outstanding stock of that issue.

The amendments have also expanded the scope of transactions subject to such reporting and disclosure obligations. Formerly, short-sale transactions subject to the reporting and disclosure obligations were limited to short sales conducted on a Japanese stock exchange. This limitation no longer applies and, as a result, even short-sale transactions that are conducted via a proprietary trading system or as an over-the-counter transaction in Japan will be subject to the reporting and disclosure requirements described above.

Prohibition of naked short selling

The amendments have expanded the prohibition of naked short selling to apply to not just a public stock exchange, but also proprietary trading systems in Japan.

The amendments also clarify the language of the prohibition to capture situations in which traders seek to effect naked short sales, in circumvention of the legislation, through the use of a securities broker.

Takashi Itokawa

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