Short-selling ban lifted but FSA warns it could be reintroduced

Published on Monday 5 January 2009 20:20

THE controversial ban on short-selling shares will end next week, the financial services watchdog revealed last night.

A temporary prohibition was introduced on 18 September amid concerns that the practice had plunged a distressed banking sector into a whirlpool of volatility.

Last night the Financial Services Authority (FSA) announced that the ban would be lifted on 16 January.

However, the FSA warned that if it became aware of disorderly markets in future it was "prepared to reintroduce the ban without consultation if necessary".

The regulator also said that it was extending its temporary disclosure regime that makes short-sellers reveal significant net short positions in a company's stock to the market to 30 June.

That earlier crackdown was introduced last June when the FSA said short-selling in volatile trading conditions was creating the potential for abuse of major bank rights issues.

Around that time Royal Bank of Scotland was raising 12 billion in the stock market and HBOS 4bn, and both were said to be the target of short-sellers.

The FSA's latest move was welcomed by powerful City bodies and politicians.

John McFall, chairman of the Commons treasury select committee, welcomed the FSA's decision yesterday even though he had called for an extension of the ban on shorting financial stocks last week.

McFall had claimed the situation in the market had not improved enough to warrant the ban being lifted.

But the Labour MP, told The Scotsman yesterday: "I welcome the decision. The FSA has said very clearly that if they discover any (new] problems they will impose a complete ban without consultation.

"That means the financial industry is on probation. I'm happy with that proposal."

A spokesman for the British Bankers' Association said the industry felt the regulator had "struck a sensible balance" on short selling.

The spokesman said: "It is right to allow short selling to resume and the industry is prepared for the removal of the ban.

"Continuing the current ban could give rise to speculation that short selling could ultimately be forbidden altogether and, as we have always said, legitimate short selling can be useful."

Short selling is borrowing a company's shares to sell in the market in the hope of buying shares back at a lower price, and pocketing the difference as profit.

Supporters say one advantage of short selling is it adds liquidity to the stock market.

Dick Saunders, chief executive of the influential Investment Management Association, said: "We very much welcome the news that the ban will be coming to an end, although we recognise that, due to the circumstances of the time, it was reasonable to introduce it.

"We hope that it won't be necessary to reintroduce the ban."

The FSA has also altered the transparency rules on short selling. Currently any short positions over 0.25 per cent must be disclosed, with further disclosures if there are any added changes.

In future, additional disclosures will only be necessary at 0.1 per cent banding levels – at 0.35 per cent and 0.45 per cent for example.