Austria Restricts Short Selling, But No Ban;

UNCLAS SECTION 01 OF 02 VIENNA 001454

SIPDIS

TREASURY FOR FTAT AND OCC/EILEEN SIEGEL
TREASURY ALSO FOR OASIA/ICB/VIMAL ATUKORALA
TREASURY PASS FEDERAL RESERVE, FINCEN, SEC/E.JACOBS

E.O. 12958: N/A
TAGS: EFIN AU
SUBJECT: Austria Restricts Short Selling, But No Ban;
No Immediate Prospect for Further Reform

REF: VIENNA 1120


1. SUMMARY: On September 22, Austria's Financial
Market Supervision (FMA) restricted short-selling by
defining stricter parameters for market manipulation
and insider trading. Regulators are unhappy that
they cannot ban short sales outright since a
legislative motion approved by the outgoing
parliament is now void and must be reintroduced in
the new parliament. In August, the supervisory
authorities presented a package for improving
financial market supervision but there is little
prospect of quick action. END SUMMARY.

Financial Market Authority Restricts Short Selling
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2. In a September 22 circular, the Austrian
Financial Market Authority (FMA) restricted short
selling that constitutes market abuse or insider
trading, with detailed reporting requirements. In
its circular, the FMA refers to the Austrian Stock
Exchange Act paragraph 48d/9 (market manipulation)
and paragraph 48e/5 (covering actions carried out
both in Austria or abroad) and to the EU's Market
Abuse Directive. The main points of the FMA's
circular as they apply to short sales:

-- Taking on or holding net short positions may
constitute market abuse. A net short position is
defined as offsetting and/or aggregated positions in
a financial instrument.

-- To determine whether a "net short position"
exists, the entire financial interest in the price
development of a specific financial instrument has to
be assessed. This includes equities as well as
derivatives (e.g., options, futures, convertible
bonds).

-- A net short position of more than 0.25% of an
issuer's capital outstanding is regarded as a
significant indicator of a situation of market abuse.

-- In addition, the Vienna Stock Exchange and the
central clearing agent CCP.A, in co-ordination with
FMA, have reduced by 8 days the period allowed for
covering deliveries not made on time.

-- Market manipulation includes the spreading of
rumors as well as false and misleading information.
Under the law, such situations must be reported to
FMA without delay.

-- These provisions also apply to transactions that
were carried out abroad but involve financial
instruments admitted to trading on a regulated market
in Austria.


3. The FMA has reportedly intensified the exchange
of information and data with the Committee of
European Securities Regulators (CESR). The FMA has
alerted custodian banks to the relevant provisions of
the Safe Custody Act (Depotgesetz) under which they
are also required to monitor their clients'
compliance with delivery obligations. Using third-
party securities as security for delivery obligations
is illegal, the FMA reconfirmed.

Parliamentary Action Void Due to Elections
--------------


4. In the final plenary session of Parliament's
Lower House (Nationalrat) September 24, the OVP and
BZO filed a motion asking the Finance Minister to
strengthen financial market supervision and restrict
manipulative short-selling. The motion, based on an
initiative of the Austrian Financial Market Authority
(FMA) and the Austrian National Bank (OeNB),was
approved with a majority, except for votes of the
SPO. The FMA and OeNB are unhappy that the motion
was not accepted unanimously, because short selling
reportedly is a widely used practice on the Vienna
Stock Exchange, which due to its low market
capitalization could become a serious danger for
companies and the Austrian economy as a whole.
Moreover, Austria is not following the example of

VIENNA 00001454 002 OF 002


many important financial markets, including the U.S.,
UK and Germany, where short selling has been banned,
at least temporarily. The September 24 motion is now
void must be reintroduced in the new Parliament.
Since its constitutive session is not scheduled until
October 28 -- and Austria will probably still have a
caretaker government then -- any new motion must wait
until at least November.

COMMENT
--------------


5. The untimely collapse of the last government and
the dissolution of Parliament are only partly to blame
for the weak response to the financial crisis. In
recent months, the authorities have not responded to
the international financial crisis, an issue which also
failed to gain traction during the September election
campaign. As reported (reftel),the financial market
reform that took effect January 1 was limited by party
politics, a point driven home by the fact that barely
eight months later (August 8),the FMA and OeNB
presented a joint package for further reform of
financial market supervision on issues including off-
balance positions, supervision of trusts, balance sheet
regulations for derivative products and hedging,
regulations for guarantees, and additional powers for
the supervisors such as search/seizure and higher
penalties. In the near term, Austrian regulators must
make the best of their limited powers.

GIRARD-DICARLO