FSA clamp down on short-selling

Last week, shares in HBOS, the UK’s biggest mortgage lender, were targeted by short-sellers after it announced plans to raise £4 billion via a rights issue.

Short-selling is when an investor borrows company stock owned by another investor, then sells the shares in the market, hoping the price will drop. They then buy the shares back at a lower price.

As a result, the Financial Services Authority (FSA) is focusing its attention to short-selling and from next week, investors with ‘short’ positions in firms offering new shares will have to declare their interest.

The FSA is concerned that, due to current market conditions, there is increased potential for market abuse through short selling during rights issues.

Many experts in the City say that short-selling is now an established practice and many are doing it for a variety of different reasons.

Sir Michael Savory, a former chairman of HSBC Stockbroker Services, said there is clearly quite a lot of short selling.

According to Sir Michael, this can be potentially damaging not only to the issuers in question but also to confidence in the overall fairness and quality of the UK market. He added that it can be particularly prejudicial to the interests of small investors.

Sir Michael explained that when banks’ balance sheets are under pressure, there is an opportunity for institutional investors to short their positions. Many of the institutions are existing shareholders in these banks, what they are doing is protecting their existing investment by shorting.

Other banks planning rights issues include RBS and Bradford & Bingley.

From 20 June, the FSA will introduce the changes that will require the disclosure of significant short positions in stocks admitted to trading on prescribed markets which are undertaking rights issues.

The FSA will define a significant short position as 0.25% of the issued shares achieved via short selling or by any instruments giving rise to an equivalent economic interest.

The obligation will be to disclose positions exceeding this threshold to the market by means of a Regulatory Information Service by 15:30 the following business day, explained the FSA.

The new measures have been criticised by many in the City. Lawyer Simon Morris of CMS Cameron McKenna said they were changing the geography of the market without any consultation.

On one hand, the FSA says that short-selling is a legitimate technique but on the other hand, the FSA is claiming that it could lead to market abuse, argues Mr Morris.

Mr Morris concluded by saying that if abuses are taking place, there are rules already in place to deal with them.

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