Regulation – UK short selling ban lifted but disclosure rules continue

On September 18th 2008, the UK regulator, the FSA, banned the setting up or increasing of short selling programmes in many UK-listed financial shares until this coming Friday. This ban will now lapse, but the disclosure rules will continue. In effect new short selling in the stock of a UK financial company will now be permitted from Friday morning with the disclosure of the resulting net short position required once a position reaches 0.25% of issued share capital.  Further disclosure will only be required when the short position of new or existing positions changes by a further 0.1% of issued share capital (i.e. at 0.35%, 0.45% etc). Any short position reaching these further thresholds (increasing or decreasing) has to be disclosed. If a short position decreases below 0.25% a final disclosure will need to be made.

Earlier this month the FSA quickly consulted on these measures (5th to the 9th of January) to which 33 firms responded (12 associations, two law firms and the rest financial institutions). The Hedge Funds Standards Board, a proposed self-regulatory body for the hedge funds, responded but not too many hedge funds did so. Possibly concentration on survival (deposits with hedge funds have fallen between 18 and 30% in recent weeks depending on which reports one reads) is taking their attention. Also, there is no time to devote to what is a fairly isolated trading practice – although there will be relief at the removal of the ban. There was overwhelming support for allowing the total ban to lapse (32 out of 33) but most of the responses supported the FSA’s proposal for the continuation of disclosure obligations.

The FSA plans to issue a further consultation paper with proposals on longer-term options for a short selling regime within a few weeks. The question must arise, given the state of the economy, as to why this is only in effect for financial companies.