A Brief Update on Short Selling Restrictions

18/02/2009

The Financial Services Authority (FSA) has recently published a discussion paper on short selling (DP09/01). The background to this discussion paper was the introduction (on 18 September 2008) of (much publicised) measures prohibiting the active creation or increase of net short positions in the stocks of UK financial sector companies. There were, in addition to the prohibition, certain disclosure requirements in relation to net short positions in the stocks of UK financial sector companies.

These measures were only ever envisaged to be emergency measures and the FSA ban on creation or increase of net short positions lapsed on 16 January 2009. The requirements in relation to the disclosure of information pertaining to short positions do however continue in full force and effect until 30 June 2009.

The date on which final comments on the discussion paper will be accepted is 8 May 2009, after which the FSA will liaise with its international counterparts including the Committee of European Securities Regulators (CESR) and the International Organisation of Securities Regulators (IOSR) with a view to publishing a longer term policy in relation to short selling and in particular in relation to disclosure of information with a view to creating a more transparent system.

No doubt the outcome of the discussion paper will be eagerly awaited by those who operate in the industry. There appears to be a feeling within the industry that a ban on short selling does not work but as Paul Marshall notes in the Financial Times*, "The one great benefit of the UK's ban on short selling financial stocks...is that it provided the perfect laboratory in which to assess the policy's merits." The feedback will therefore no doubt prove very valuable going forward.

There can be no doubt that the figures of the affected UK stocks during the period the ban was in place do not make good reading for any proponents of a ban as a means of shoring up stocks - during the ban the RBS share price fell 78%, the Lloyds price by 59% and the Barclays price 66%**. As Paul Marshall commented, "...banning hedge funds from short selling is akin to asking Formula One drivers to operate without brakes...". It seems the industries response will be all but unanimous, but it remains to be seen how the FSA, CESR, IOSR and others will move forward whilst trying to achieve greater transparency in the market.

* Financial Times, 11 Feb 2009, p13

** Source: Financial Times, 11 Feb 2009, p13

Contact: ritapadam@city-law.net

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