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FSA lifts ban on short selling of UK financial stocks

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The Financial Services Authority has followed through on its announcement earlier this month that it would not renew its ban on the short selling of UK financial sector stocks, which was i

The Financial Services Authority has followed through on its announcement earlier this month that it would not renew its ban on the short selling of UK financial sector stocks, which was introduced on September 23 and expired at midnight on Thursday, January 15.

However, the disclosure regime regarding net short positions in the shares of quoted UK financial companies will continue, subject to slight modification, until June 30. Henceforth investors will be required only to disclose increases or decreases in net short positions once they reach 0.25 per cent and thereafter change by increments of 10 basis points.

The new thresholds will affect disclosures due to be made on Monday, January 19 onward. Previously any change in the size of short positions, however small, had to be reported.

Legal experts have welcomed the end of the outright ban on short selling of financial sector stocks but continue to complain about the extension of the disclosure regime fort at least another six months.

‘The lifting of the ban has been welcomed by participants across the financial markets because it is perceived to have had a detrimental effect on liquidity and spreads in the stocks that were subject to the ban – and there is a body of academic research that supports this perception,’ says Darren Fox, a partner in the financial services team at law firm Simmons & Simmons. ‘The FSA should be commended for doing the right thing in terms of market efficiency in the face of a degree of political pressure to maintain the ban.

‘As regards the extension of the disclosure regime, the FSA has not, in my view made a proper case for this in terms of its cost-benefit analysis. It is also disappointing that the extended disclosure regime still forms part of the FSA’s market abuse regime, instead of being a stand-alone regime like that for disclosures of long positions.

‘This may serve to reinforce the current negative perception of short selling in the media and among the public, that short selling is abusive rather than a normal and vital part of efficient capital markets.

‘The FSA has failed to explain adequately why, in its view, a failure to make a disclosure under the short selling regime is market abuse per se, whereas a failure to make a disclosure under the stand-alone regime for long positions is not. Hopefully the longer-term proposals to be consulted on by the FSA within the next month will address these issues.’

Robin Johnson, a partner at Eversheds, adds: ‘To keep London competitive as a major share-trading platform it is vital that the market is allowed to operate freely within the law. Self-regulation on short selling in financial stocks was probably necessary last year to restore confidence, but actually even when it was banned, the stocks it affected continued to slide.

‘Professionals are aware of the risk of short sellers and the potential for market manipulation. The bigger issue is actually counterparty risk and whether some brokers have a balance sheet to support holding stock on behalf of hedge funds. If short sellers use collateral to do deals, another brokerage failure could create more problems than the concept of short selling itself.’

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