As widely reported in the media, on 18 September 2008 the Board of the Financial Services Authority announced that it was prohibiting the active creation or increase of net short positions in publicly quoted financial companies with effect from 19 September. The FSA indicated that, while it regarded short selling as a legitimate investment technique in normal market conditions, it considered that extreme circumstances had given rise to disorderly markets. As a result, the FSA stated that it was taking action to protect the integrity of the markets and to guard against further instability in the financial sector. The rules which were published on 18 September to implement the prohibition were subsequently supplemented by additional rules published on 24 September. The FSA has also published and updated a Frequently Asked Questions paper relating to the rules.
The relevant rules were implemented through the introduction of two significant new provisions to the FSA's Code of Market Conduct (MAR), as well as certain amendments to the FSA Handbook Glossary. The new rules:
(i) prohibit short selling in relation to "UK financial sector companies" (comprising UK banks, UK insurers or UK incorporated parent undertakings of UK banks and insurers) where the main business of the relevant group is financial services. There is an exemption for market makers. The FSA has published and updated a list of the relevant companies. The latest list, published 23 September, comprised 34 UK banks and insurers;
(ii) require (with effect from 23 September 2008) daily disclosure of all net short positions in excess of 0.25% of the ordinary share capital of the relevant companies held at market close on the previous working day.
Broadly, market abuse will be committed where a person:
- enters into a transaction that (whether by itself or in conjunction with other transactions) has the effect of either (a) creating a net short position in a UK financial sector company or (b) increasing any net short position in a UK financial sector company that the person had immediately before 19 September 2008; or
- fails to disclose the existence and amount of any net short position that represents an economic interest of 0.25% or more of the issued capital of a UK financial sector company on a RIS by no later than 3.30pm on the business day following each day on which such disclosable short position is held.
The rules make it clear that in calculating whether or not a person has a net short position "any form of economic interest in the shares of the company" must be taken into account.
These new temporary rules are stated to cease to have effect on 16 January 2009. In its 18 September announcement, the FSA stated that the temporary rules would be reviewed after 30 days and that a comprehensive review of the rules on short selling will be published in January 2009.
Interestingly, the FSA also indicated in its statement that it "stands ready to extend this approach to other sectors if it judges it to be necessary". There was no indication in the announcement of which other sectors the FSA might be monitoring in this respect.
The new disclosure requirement builds on the disclosure regime for significant short positions in companies undertaking rights issues announced by the FSA on 13 June 2008 which we have previously reported on and which was also implemented through new provisions in the Code of Market Conduct.
View the Short Selling (No 2) Instrument 2008 published 18 September 2008 (4 page pdf).
View the Short Selling (No 3) Instrument 2008 published 24 September 2008 (2 page pdf).
View Version 3 of the FSA's short selling FAQs published 26 September 2008 (7 page pdf).