FSA introduces short seller disclosure regime

New rules force short sellers to disclose positions in companies undertaking a rights issue

LONDON – Concerns over the potential for abuse through short selling during rights issues during the current market instability have prompted the UK’s Financial Services Authority (FSA) to introduction new disclosure rules for short sellers.

Although short selling is a legitimate technique and is not considered to be a form of market abuse, it has been shown to produce severe volatility in companies’ share price when there is a rights issue involved. As a result the FSA believes that improving transparency of significant short selling would be a good means of preventing the potential for market abuse.

“In these circumstances non-disclosure of significant short positions gives the market a false and misleading impression of supply and demand in the securities concerned. We are therefore introducing provisions in our Code of Market Conduct, to come into effect from Friday 20 June 2008, which will require the disclosure of significant short positions in stocks admitted to trading on prescribed markets which are undertaking rights issues. For this purpose we are defining a significant short position as 0.25% of the issued shares achieved via short selling or by any instruments giving rise to an equivalent economic interest. The obligation will be to disclose positions exceeding this threshold to the market by means of a Regulatory Information Service by 3.30pm the following business day,’ said the FSA.

The regulator has introduced the move after HBOS was forced to clarify its trading position earlier this week when traders sent the bank's shares below the quoted price of 275p that the lender intends to sell the shares to raise £4 billion through a rights issue next month. Following the FSA’s announcement, shares in HBOS were up by 7.77%, to 305p in early trading today.

In addition to this new disclosure regime, the regulator is considering whether it might be necessary to take further measures in this area. It is currently examining options such as restricting the lending of stock of securities in rights issues for the purposes of enabling short selling; and restricting short sellers from covering their positions by acquiring the rights to the newly issued shares.