Investment Management/Hedge Fund Alert
January 2009
Authors:
Philip Morgan
+44.(0)20.7360.8123
philip.morgan@klgates.com
Neil Nick Robson
+44.(0)20.7360.8130
neil.robson@klgates.com
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FSA Short Selling Update
Short Selling Ban
The UK’s Financial Services Authority (FSA) announced on 5 January 2009 that it
proposes not to renew its temporary ban on the holding of net short positions in UK
financial sector companies after the current ban expires on 16 January. The ban was
introduced on 18 September 2008 after a week in which the stock prices of some
leading UK financial institutions had dropped substantially as a result of the turmoil
in the financial markets. The FSA now considers that the exceptional conditions in
the markets, which caused them to impose the ban, have changed, although it will not
hesitate to reinstate the ban, if necessary.
Short Selling Disclosure Regime
In addition, yesterday’s announcement has confirmed that the FSA proposes, with
effect from 16 January, to extend the temporary disclosure regime for significant net
short positions in the stocks of UK financial sector companies until 30 June 2009. The
simultaneous lifting of the short selling ban will effectively re-activate the disclosure
regime, which has, up to now, only applied to short positions existing before 19
September 2008.
Currently a disclosure must be made if a net short position exceeds 0.25% of a relevant
financial institution’s issued shared capital, with further disclosures required if there
are any changes in the position. The FSA has now proposed that disclosure should be
made when the net short position reaches, exceeds or falls below a disclosure threshold
of 0.25% and each 0.1% threshold thereafter (i.e. 0.25%, 0.35%, 0.45% etc).
The FSA’s disclosure regime requiring the holder of an existing or new net short
position representing 0.25% or more of the shares in a company undertaking a rights
issue remains in place.
The FSA has consistently made it clear that it believes that short selling is a legitimate
investment technique in “normal market conditions” and that short selling can enhance
the efficiency of the price formation process and enhance liquidity. However, the FSA
maintains that, in turbulent markets, short selling may have a negative impact and
continuing the disclosure obligations should reduce the potential for abusive behaviour
and disorderly markets.
Investment Management/Hedge Fund Alert
Public Consultation
A public consultation on the FSA’s proposals will
close on 9 January to enable the proposed new
measures, with any changes introduced as a result
of the consultation, to be in place at the expiry of
the short selling ban on 16 January. The FSA also
proposes to publish a separate consultation paper
within a month setting out its proposals for a longerterm short selling regime.
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