New provisions introduced by the Financial Services Authority will prohibit “short selling” in certain publicly quoted financial companies.
On 18 September 2008, the United Kingdom’s financial services regulator, the Financial Services Authority (FSA), introduced new provisions to prohibit the active creation or increase of net short positions in certain publicly quoted financial companies. The rules came into effect at midnight on 19 September 2008, and they are currently set to cease to have effect on 16 January 2009. The FSA has stated that it will keep these rule changes under review in the light of market conditions.
In addition, the FSA has required, from 23 September 2008, the 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 19 September 2008 were also required on 23 September 2008. The FSA stands ready to extend this approach to other sectors if it judges it to be necessary.
The new prohibition and disclosure rules also cover “uncovered short positions” concerning shares issued by certain publicly quoted companies. The FSA’s amended list in this respect, as at 23 September 2008, contains 34 UK incorporated banks and insurers.
The only exemption to these new disclosure and prohibition rules covers market makers. The FSA’s view of “market making” for the purposes of these new rules is as follows: “A market maker is an entity ordinarily as part of their business dealing as principal in equities, options or derivatives (whether OTC or exchange-traded) to fulfil orders received from clients, to respond to a client’s requests to trade or to hedge positions arising out of those dealings”.
The potential consequences of non-compliance with the new disclosure requirements will be the same as for any breach of the United Kingdom’s market abuse regime. The FSA has a range of actions at its disposal which include enforcement action, which could culminate in unlimited fines or a public censure.
In the context of these new rules, Hector Sants, chief executive of the FSA, has said: “While we still regard short-selling as a legitimate investment technique in normal market conditions, the current extreme circumstances have given rise to disorderly markets. As a result, we have taken this decisive action, after careful consideration, to protect the fundamental integrity and quality of markets and to guard against further instability in the financial sector”.