The Financial Services Authority has banned the short-selling of shares in publicly quoted financial companies.
Many commentators believe this practice has contributed to the events of the last week with the collapse of Lehman Brothers, the sale of Merrill Lynch to Bank of America, and the dramatic fall in share price of HBOS forcing a rescue take over by Lloyds TSB.
In addition, the FSA has said that from Tuesday 23 September all net short positions must be disclosed on a daily basis.
The FSA stands ready to extend this approach to other sectors if it judges it to be necessary.
These provisions will remain in force until 16 January 2009, although they will be reviewed after 30 days. A comprehensive review of the rules on short-selling will be published in January.
Hector Sants, chief executive of the FSA, said: “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.
“As a result, we have taken this decisive action, after careful consideration, to protect the fundamental integrity and quality of markets and to guard against further instability in the financial sector.”
Callum McCarthy, chairman of the FSA, addressed the Lord Mayor's City Banquet at the Mansion House last night, saying: “We intend this prohibition to run in the first instance for some 120 days, during which time we will review both its effectiveness and the general policy we wish to adopt in respect of short selling more generally.
“This is a measure which reflects the present turbulence in markets. It is designed to have a calming effect – something which the equity markets for financial firms badly need. I hope that practitioners will support both the ambition and the chosen means of achieving it.”
Liberal Democrat Treasury Spokesperson, Lord (Matthew) Oakeshott welcomed the ban, and said: “The Liberal Democrats welcome this emergency action by the FSA, as called for by Vince Cable. Massive short sales of bank shares by hedge funds have made the current crisis far worse.
“The Government and FSA must think long and hard before ever allowing short sales of British bank shares again, and clamp down now on stocklending, which makes short selling cheap and easy.”
Date: 18th, September, 2008
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