The FSA has issued a feedback statement summarising and responding to the feedback it received to its consultation on short selling.
Background
In response to concerns about the impact on the market of short selling (the practice of selling stocks the seller does not own), the FSA introduced requirements to disclose short positions in stocks in UK financial sector companies. These requirements were introduced on an emergency basis in 2008 and expired on 30 June 2009. The FSA published a consultation paper setting out its proposals for a disclosure regime in the longer term.
In July 2009, the Committee for European Securities Regulators published a Consultation Paper on a proposal for a pan-European short selling disclosure regime. The CESR proposals were similar to the FSA proposals but, as well as requiring public disclosure to the market of net short positions of 0.5% of the company’s issued share capital and above, it also proposed that when a short position reaches 0.1%, a disclosure would have to be made to the regulator of the most liquid market for the shares in which the position was held. This would be a private disclosure.
Feedback Statement
Key points mentioned in the FSA paper include:
- The FSA intends to pursue transparency by requiring disclosure of short positions on all equities (not just those in financial sector companies).
- Whilst the FSA does not propose introducing a general ban on naked short selling (the practice of selling a financial instrument short without first borrowing the security or ensuring that the security can be borrowed, as is done in a conventional short sale), it says that it “would be concerned with any naked short selling carried out with no intent or reasonable plan for delivery of shares on the intended settlement date, and would be prepared to pursue action against such conduct”.
- The FSA recognises that short selling by underwriters of rights issues serves a legitimate and valuable purpose, and a ban on it could have an adverse affect on the success of the rights issue. Accordingly, the FSA is not proposing a permanent ban. However, it encourages parties to a rights issue to take into account guidance being developed following recommendations from the Rights Issue Review Group, which will be published in due course.
- The Government is consulting on proposals which would give the FSA powers to impose an emergency ban on short selling.
- The UK regime is likely to apply to issuers admitted to trading on regulated or prescribed markets in the UK for whom the UK is the most liquid market for the shares in which the position was held. This would be in line with CESR’s proposals.
- The FSA favours a regime based on public disclosure of individual positions rather than aggregated positions (a controversial issue, but one which the FSA felt that resistance to which was based more on the fact that the market was opposed to public disclosure of individual positions rather than an attraction to the merits of aggregation).
As CESR is due to publish its final proposals for a pan-EU short selling disclosure regime at the end of 2009, the FSA will wait before proposing any rule changes to ensure that it can align its rules with any proposed by CESR.
The FSA’s feedback statement “Short selling: feedback on DP09/1” is available at http://www.fsa.gov.uk/pubs/discussion/fs09_04.pdf.
