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Comment: Happy new short-selling ban extension!

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‘Ring out the old, ring in the new’ is a new year catchphrase that may well be apposite for most financial sector players in 2009, but hedge fund managers may well find themselves facing m

‘Ring out the old, ring in the new’ is a new year catchphrase that may well be apposite for most financial sector players in 2009, but hedge fund managers may well find themselves facing more of the old.

As the temporary three-month prohibition on short selling of UK financial stocks comes to a close on January 16, the Financial Services Authority is now under pressure to extend the ban from politicians who believe that the danger to the financial sector is not yet over.

Vince Cable, the influential Liberal Democrat economic spokesman, expects the UK regulator to take a measured approach rather than introduce a permanent ban, telling The Times: ‘I would expect them to introduce new requirements, such as increasing the amount of collateral needed to borrow shares.’

However, John Redwood, the MP who heads Conservative Party leader David Cameron’s economic policy group, says that the ban should be allowed to expire, as it had provided little or no relief from the downward pressure on financial stocks.

Certainly there’s plenty of research to suggest that the bans on shorting of financial stocks introduced in the UK and elsewhere not only failed to curb price falls or reduce volatility, but in fact may have increased volatility by reducing liquidity. Hedge fund managers have insisted from the start that the measure threatened to damage London’s position as an international financial centre.

Even Christopher Cox (photo), the outgoing chairman of the FSA’s US counterpart, the Securities and Exchange Commission, has admitted that in the same position a second time the SEC might well not repeat its short-selling ban, which lasted around a month.

But with the financial sector still far from cured and continuing fears of instability in the banking sector, it’s by no means clear the FSA will bow to the evidence that the restrictions have not worked and may have been counterproductive.

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