On Thursday 18 September, the United Kingdom (“UK”) Financial Services Authority (“FSA”) amended its Code of Market Conduct to prohibit short selling in UK financial sector stocks and to impose daily disclosure requirements with respect to pre-existing short positions in such stocks. The ban goes into effect on 19 September and the disclosure requirement goes into effect on 23 September. The new rules apply to everyone and not just to UK regulated firms. Both the short-selling prohibition and the daily disclosure requirement are currently intended to cease to have effect on 16 January 2009. A comprehensive review of the rules relating to short selling is expected in January 2009.

Short Sale Prohibition

Under the short-sale prohibition, any person who enters into a transaction that has the effect of creating or increasing “net short positions” in 29 specified publicly quoted “UK financial sector companies” will be deemed to be “engaging in behaviour that is market abuse (misleading behaviour).” A net short position covers not only securities but also any position that “gives rise to an economic exposure to the issued share capital of a company.”

Daily Short Disclosure

Under the disclosure requirement, starting on Tuesday 23 September, any person holding a “disclosable short position” in a UK financial sector company must provide “adequate ongoing disclosure” on a Regulatory Information Service (“RIS”) to be filed not later than 3:30 pm on the business day following the day on which the “disclosable short position” is held, except that disclosures filed on 23 September will cover positions held on both 19 and 22 September. For purposes of this requirement, “disclosable short position” is defined as “a net short position which represents an economic interest of one quarter of one per cent or more of the issued capital of a company.” Failure to comply with the daily-disclosure requirement “is behaviour which, in the opinion of the FSA, is market abuse (misleading behaviour).”

As a result of these new disclosure changes, anyone who has not covered an open short position of 0.25% or more in a UK financial sector company on Friday 19 September, will be required to report that short position daily beginning 23 September until either the position is closed out or the new rules cease to have effect.

The FSA rules will apply to trading in financial instruments tied to the 29 UK financial sector companies and may include financial instruments traded outside of the UK.

The FSA has issued guidance in the form of answers to what they expect will be frequently asked questions.

This can be found on FSA’s website at http://www.fsa.gov.uk/pubs/other/short_selling_faqs.pdf.