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The FSA introduces immediate ban on short selling of financial companies
The Financial Services Authority (FSA) yesterday introduced new provisions to the Code of Market Conduct to prohibit the “active creation or increase of net short positions in publicly quoted financial companies” from midnight on 18 September.
In addition, the FSA will require from Tuesday 23 September daily disclosure of all net short positions in excess of 0.25 per cent of the ordinary share capital of the relevant companies held at market close on the previous working day. Disclosure of such positions held at close on Friday 19 September will also be required on Tuesday 23 September. 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.
While the FSA regard short-selling as a legitimate investment technique in normal market conditions, they believe that current extreme circumstances have given rise to disorderly markets. As a result, they have taken this action which aims to protect the fundamental integrity and quality of markets and to guard against further instability in the financial sector. It is the second and much bolder action that they have taken this summer to try and relieve pressure on UK banks.
The new rules appear in the FSA’s Market Conduct Sourcebook and establish new evidential provisions in what the FSA consider to be misleading behaviour as it relates to market abuse in the UK.
The FSA believes that any person who enters into a transaction that has the effect of creating a net short position in a UK financial sector company (UK bank, insurer or its UK parent); or increases any net short position in such a company, will be engaging in market abuse. Market makers are unaffected by this rule and the FSA will not consider transactions entered into (or placed) yesterday under these new requirements. A current list of UK financial sector companies is attached at appendix 1 to the note.
The FSA has adopted a new and broad definition of a net short position as an economic exposure to the issued share capital of a company (taking account of any form of economic interest in the shares of the company).
The FSA has also extended its disclosure requirements for disclosable short positions which were originally introduced in June in respect of rights issues only (and which seem to have had little effect). Disclosable short positions are net short positions which represents an economic interest of 0.25% or more of the issued capital of a company. Adequate ongoing disclosure of relevant short positions is made via one of the eight the Regulatory Information Service Providers by 3.30pm on the business day following each day on which a disclosable short position is held. The disclosure must include:
· The name of the person who has the position;
· The amount of the position, and
· The name of the company in relation to which it has that position.
The new disclosures are required from 23 September 2008 which should relate to positions held on at the close of business today (19 September 2008).
We understand that the FSA stands ready to extend this approach to other sectors if it judges it to be necessary. Last night Callum McCarthy, Chairman of the FSA described these new regulations as a prohibition in any active increase in a net short position in a financial stock by whatever instrument. He also said that the FSA will review both its effectiveness and the general policy the FSA wish to adopt in respect of short selling more generally.
STOP PRESS – SEC announces further measures to prevent short selling. More to follow.
For more information please contact Scott Wilson, Stephen Burke or Chris Rexworthy on +44(0)20 7408 2448.
List of UK incorporated banks and insurers in connection with short selling
1 ADMIRAL GROUP PLC
2 ALLIANCE & LEICESTER PLC
3 ALLIANCE TRUST PLC
4 ARBUTHNOT BANKING GROUP PLC
5 AVIVA PLC
6 BARCLAYS PLC
7 BRADFORD & BINGLEY PLC
8 BRIT INSURANCE HOLDINGS PLC
9 CHESNARA PLC
10 EUROPEAN ISLAMIC INVESTMENT BANK PL
11 FRIENDS PROVIDENT PLC
12 HBOS PLC
13 HIGHWAY INSURANCE GROUP PLC
14 HSBC HOLDINGS PLC
15 ISLAMIC BANK OF BRITAIN PLC
16 JUST RETIREMENT HOLDINGS PLC
17 LEGAL & GENERAL GROUP PLC
18 LLOYDS TSB GROUP PLC
19 LONDON SCOTTISH BANK PLC
20 NOVAE GROUP PLC
21 OLD MUTUAL PLC
22 PRUDENTIAL PLC
23 RESOLUTION PLC
24 ROYAL BANK OF SCOTLAND GROUP PLC
25 RSA INSURANCE GROUP PLC
26 ST JAMES'S PLACE PLC
27 STANDARD CHARTERED PLC
28 STANDARD LIFE PLC
29 TAWA PLC
19th September 2008
