Bank Negara Malaysia (BNM) issued in October 2005 guidelines on the short selling of securities in Malaysia’s money market. Previously, short selling was limited to primary dealers. With the new regulations, commercial banks, finance companies, merchant banks and discount houses that are interbank players, and universal brokers as approved by the Securities Commission to undertake short selling transaction are now included as eligible participants. Bursa Malaysia will officially launch short selling in January 2007.

The BNM still does not allow retail investors to short sell government securities. Only interbank players licensed under the Banking and Financial Institutions Act (BAFIA) 1989 and universal brokers as approved by the Securities Commision are allowed to do a short selling transaction.

Eligible securities for short selling includes any specific issue of Malaysian Government Securities with an outstanding nominal amount of at least RM 2.0 billion and remaining tenure to maturity of 10.5 years or less, at the time when the short selling position is created. Participants can transact for their own account only. Other types of government debt securities and financial instruments such as equities are still not allowed to be sold short in the Malaysian capital market.

There are two types of short selling activities defined in the regulations:

Covered short selling – activities with borrowed securities obtained via reverse repo or securities borrowing and lending facilities on the short selling transaction date.

Naked short selling – activities without borrowed securities. Dealers close out the naked short selling position by conducting an offsetting deal at a later date.

Only covered short selling is allowed and transaction should not exceed 12 months from the trade date. Naked short selling is not allowed in order to minimize market manipulation activities.

To set the limitations and responsibilities of investments banks, BNM issued a framework for investment banks. A copy of the BNM circular is linked below.