FSA clamps down on short-selling

Posted by admin on 18 September, 2008 under Business news | Be the First to Comment

The City regulator has announced restrictions on short-selling, whereby traders bet on share prices falling, in a bid to tackle market instability.

The Financial Services Authority (FSA) is clamping down on the practice that some believe contributed to the sharp falls in HBOS shares in recent days.

Some analysts argue that short-selling was a factor that led to the £12.2bn takeover of HBOS by Lloyds TSB.

The changes will be effective from midnight on Thursday.

The restrictions, which will be in force until 16 January 2009, will be reviewed after 30 days.

“While we still regard short-selling as a legitimate investment technique in normal market conditions, the current extreme circumstances have given rise to disorderly markets,” said FSA chief executive Hector Sants.

“There is a danger in a trading system which allows financial institutions to be targeted and subject to extreme short-selling pressures” Callum McCarthy Financial Services Authority chairman

‘Financial stability’

Short-selling is a technique that sees investors borrow an asset, such as shares, currencies or oil contracts, from another investor and then sell that asset in the relevant market hoping the price will fall.

The aim is to buy back the asset at a lower price and return it to its owner, pocketing the difference.

Anyone can short a position in a company’s shares, but typically hedge funds are the main players.

Chancellor Alistair Darling welcomed the move by the FSA.

“I believe it is the right thing to do in the current market conditions and in the interests of financial stability,” he said.

Markets have fluctuated hugely in recent days, with fundamental changes occurring in the financial landscape.

There are fears that several firms, including Lehman Brothers, which filed for bankruptcy at the start of the week, and insurance giant AIG, which was rescued by the Federal Reserve, were targeted by those short-selling.

Speaking to the BBC, Mr Darling underlined that short-selling was not wrong in itself.

“It can help actually in providing funds, liquidity, for companies.”

But he added that it could become a problem where people “deliberately” manipulate a market, making “a difficult situation even worse”.

Callum McCarthy, chairman of the Financial Services Authority, expressed concerns over recent volatility.

“There is a danger in a trading system which allows financial institutions to be targeted and subject to extreme short-selling pressures, because movements in equity prices can be translated into uncertainty in the minds of those who place deposits with those institutions with consequent financial stability issues.”

Broader moves

It was not only in the UK that attempts were being made to address short-shelling.

The US financial regulator, the Securities and Exchange Commission (SEC), also announced restrictions on short-selling on Wednesday.

And on Thursday, New York attorney general Andrew Cuomo said he would start a probe into short-selling.

At issue is whether certain traders exploited short-selling to push down stock prices, breaching market rules.

New York’s state pension funds said it would cease lending stocks in 19 firms to short-sellers on a temporary basis.

News reported by The BBC