FSA call for extension of short-selling disclosure rules

As the net of regulation closes around hedge funds, the Financial Services Authority yesterday proposed extending rules mandating the disclosure of short-selling positions it has applied to financial shares to all UK stocks.

The FSA said the disclosure requirement would apply to investors taking short positions amounting to 0.5 percent or more of any company's stock. The threshold would fall to 0.25 percent in the case of companies undertaking rights issues.

"We believe that enhanced disclosure across the whole market is the right way forward," said Sally Dewar, the FSA's managing director of wholesale and institutional markets.

"We also consider it to be important that we align our proposals with those being developed on an international basis and we are working towards this."

In September last year, the FSA imposed a temporary ban on short-selling financial stocks amid concerns that the practice was exacerbating confidence-sapping falls in the share prices of banks and other key financial institutions.

The ban expired last month, but short-sellers of financial stocks are still required to disclose positions exceeding 0.25 percent of the company's share capital.

In effect the move would increase disclosure requirements a hundred-fold from the 34 stocks now covered to the more than 3,000 traded overall.

Yesterday's FSA proposal will come as a blow to hedge funds, the main practitioners of short-selling, who are fighting to retain the relatively light regulatory regime they trade under as they try to get through one of the hardest times in the industry’s history. Tumbling markets and investor redemptions are forcing many to close and additional disclosure could further ramp up their costs as they divert - or hire - workers to satisfy the rules.

The industry's luminaries, who faced a parliamentary committee grilling last month ,had argued for a repeal of even the current disclosure requirements on financial stocks.

The Alternative Investment Management Association, the hedge fund industry’s trade body, declined to comment yesterday about the proposal.

The financial regulator said extending the disclosure rules to all stocks would improve transparency for stock market investors, but stressed that no further direct constraints on short-selling are planned.

"The FSA believes that the benefits of short-selling such as price efficiency and liquidity normally outweigh the disadvantages, and propose that there should be no direct restrictions on short-selling," it said.

Short-sellers have in the past been blamed for hindering the rights issues launched by mortgage lender HBOS and rival Bradford & Bingley. Both banks saw their share price fall below the rights issue price, deterring shareholders from taking part in the fundraising. However those against the ban have argued the price of banking shares fell more in October during the ban than they did before.

The FSA said it was inviting feedback on its proposals until May 8, and would publish its conclusions at a later date.

Parties have until May 8 to express their opinions on the proposal.