Setting up best practices for short-selling and stock-lending tops the priority list of the World Federation of Exchanges for 2009.

The WFE announcement to this effect is significant as rules governing short-selling in various jurisdictions continue to generate controversy among regulators, lawmakers and market participants.

Both the Bombay Stock Exchange and the National Stock Exchange are active members of the 51-member WFE.

While the US capital market regulator Securities and Exchange Commission has banned short-selling of financial shares after it was blamed for the collapse of Lehman Brothers, in India, the practice had come under the scanner as foreign institutional investors were lending stocks overseas to facilitate short-selling.

The Securities and Exchange Board of India has also warned FIIs against overseas lending of stocks and asked them to disclose any data regarding the same.

However, there have been no definitive rules and regulations regarding short-selling around the world. In India too, the stock lending and borrowing scheme, which was introduced to facilitate short-selling, has not seen any significant activity and traders are using the futures segment to short sell.

The WFE had initiated a study in October 2008, when markets the world over touched historical lows, on whether the wave of bans on short-selling was 'destabilising' for the financial sector or the practice was destructive for markets. However, the federation has not mentioned any preliminary findings in its statement released on February 2, 2009.

Most of the hedge fund managers, who fought huge redemption pressure in 2008, used short-selling to recover money. "If all large funds had come together to sell their holding in India, the market would have had to be shut as there was no depth in market and short-selling was the only way to get some money out of the market," said a Mumbai-based hedge fund manager.

The Paris-based WFE said it was working with the International Organisation of Securities Commissions, a body of market regulators, to develop a set of best practices for short-selling and stock-lending.

Apart from this, WFE also wants more transparency with regard to using 'circuit breakers' in equity markets. A circuit breaker is a mechanism that halts trading when a stock or index falls a certain percentage over a short period of time.

The federation will also examine the effects of market fragmentation.