On 18 September 2008, the FSA introduced temporary short selling measures in relation to stock in UK financial sector companies. In January 2009, the FSA extended the disclosure requirement, subject to a small amendment on disclosing changes in short positions but allowed the temporary ban to expire. When the temporary measures were introduced the FSA stated that it would conduct a review of short selling.
The FSA has now published Discussion Paper 09/1: Short selling (DP09/1). DP09/1 is set out as follows:
- Chapter 2 provides a brief description of short selling, the market participants who tend to engage in it, their reasons for doing so and the different methods used. It also provides some detail on the context in which short selling takes place.
- Chapter 3 examines the pros and cons of short selling and reiterates the FSA’s longstanding message that short selling is normally a legitimate trading activity that tends to enhance price efficiency and liquidity. The FSA also notes, on the negative side, that it can be used to commit market abuse and can contribute to disorderly markets.
- Chapter 4 provides an analysis of some of the potential constraints on short selling including: various types of prohibition on short selling (e.g. a blanket ban, bans restricted to ‘naked’ short selling); circuit breakers; and tick rules. The FSA concludes that none of these options represent a proportionate response to the risks posed by short selling – although the FSA does reserve the right to reintroduce a blanket ban on short selling on an emergency basis should market conditions require. The heightened potential risks of short selling of stocks of companies engaged in rights issues is also discussed in Chapter 4. On balance, the FSA concludes that a blanket ban would not be warranted, although a tighter disclosure regime is proposed.
- Chapter 5 examines the options for enhanced transparency. The FSA has considered a regime based on disclosure of aggregate short positions, but does not consider that the benefits of such a system, which relies on a marking or flagging system, justifies the very high market costs that are involved. Instead, the FSA favours an amended version of its current disclosure obligation but extended to cover all UK stocks. This means that the FSA favours disclosure of positions in specific stocks by individual position holders to the market as a whole. The FSA does not think that private disclosure to it would achieve its regulatory objectives. The FSA also discusses important technical issues concerning the disclosure regime, such as the level at which disclosure thresholds should be set and how market participants should calculate their short positions. However, the FSA is clear that it considers it highly desirable to find an international consensus in this area, and is therefore not making any definitive detailed proposals at this stage.
Comments on DP09/1 are due by 8 May 2009.
View Discussion Paper 09/1: Short selling, 9 February 2009