1. Emerging Market Short Sales: Ambrosia or Kryptonite? Edward Pekarek, Esq. and Maryam Meseha

2. Reading Questions What are the benefits and risks associated with short selling in emerging markets? What must I be aware of before short selling in a particular emerging market? Do certain markets pose greater risk than other markets? Do various restrictions on short selling pose a incontrovertible barrier to my investment? Are there other options available to bypass the barriers to short selling?

3. Summary This chapter surveys the nature of short selling in various emerging markets, specifically the BRIC nations, and identifies various advantages and risks associated with bearish trading in emerging markets.

4. Introduction This survey focuses on what are widely considered to be the leading emerging markets, specifically the so-called BRIC nations, Brazil, Russia, India, and China. This chapter is designed to educate the reader regarding some of the basic essentials of short selling in emerging debt and equity markets.

5. Analysis: Benefits of Short Selling Fosters capital-raising because short selling frees up capital that may have been otherwise allocated to long positions during periods of market appreciation; Provides a means by which markets can segregate underperforming companies and identify mispriced securities through bearish information diffusion and transfer; Increases market liquidity.

6. Analysis: Criticisms of Short Selling Possible price manipulation; Believed to disrupt otherwise orderly markets through panic selling and resulting high volatility which can destabilize an economy; Facilitates severe price declines in individual securities.

7. Short Selling in Brazil Brazil permits short selling but imposes specific restrictions based on the citizenry of the investor. Brazil imposes restrictions on foreign short sellers by requiring them to have a legal representative stationed in Brazil. There is no indication that Brazil will lift this heavy restriction in the near future.

8. Short Selling in Russia Russia has explicitly regulated short selling since 2002; In 2008, Russia announced that it would ban margin selling and short-selling altogether in response to the worlds financial downturn; As of May 2010, these bans appear not to be lifted.

9. Short Selling in India Indias regulatory system allows for short selling but it is rarely practiced; Foreign institutions are prohibited from short sales but individual investors may make bearish wagers without restrictions.

10. Short Selling in China Short selling was prohibited in Hong Kong prior to 1994; Chinese officials lifted restrictions on March 25,1996, and allowed all of 113 Hang Seng stocks to be shorted without restriction; In the wake of the world financial crisis of 2008, China permitted short selling in order to boost trading.

11. Short Selling in Other Key Markets South Korea: Has an increased tolerance for short sales but South Korean market regulators have announced that they will tighten monitoring in order to curb volatility. Indonesia: Previously permitted investors to sell short approximately 50 major issues that trade on the bourse; It temporarily banned both covered and so-called naked short sales on October 1, 2008 for 30-days in response to the recent economic crisis; Lifted the ban in part on February 4, 2009 and revised its short sale and margin trading regulations with an effective date of May 1, 2009.

12. Short Selling in Other Key Markets The United Arab Emirates Announced in October 2010 that it would introduce short selling. Eastern Europe Largely overlooked by many investors; Can be a profitable investment region and may generally is not affected widely by short selling constraints

13. Helpful Investor Mechanisms Must identify an emerging market with an efficient lending system; Must identify an emerging market with less cumbersome lending rules; Be aware of an emerging markets regulatory system; Avoid these problems altogether investing in ADRs or ETFs.

14. Conclusion This chapter provides only a survey of various policy considerations regarding short selling in various emerging markets; The benefits and risks vary by nation with regard to emerging market short selling and investors would be well served to research the selected locales; Short selling policies in the BRIC nations vary widely, often based on political events and climates, to such an extent that any investor considering such an investment strategy must become familiar with the market before accepting the risk of unlimited losses that short selling poses.