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FSA mulls new rules on stock lending activity

Stephen Foley
Saturday 20 July 2002 00:00 BST
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The Financial Services Authority is keeping a day-by-day record of stock lending, amid fears that the short-selling activities of hedge funds are driving down the UK equity market.

The City watchdog is examining whether new regulations would be necessary to curtail short selling or make the hedge fund industry more transparent.

But the FSA's initial findings are understood to show there has been no recent increase in stock lending, where share owners or custodians loan out stock to allow short selling.

Short selling is a way of making money from falling asset prices where an investor, typically a hedge fund, sells stock it does not own in the expectation of being able to buy it back more cheaply. The initial selling itself helps to depress the price and such activity is widely believed to have contributed to the scale of the recent slide in UK equity values.

The FSA was challenged earlier this month to curtail the activities of short-sellers in a letter from David Prosser, chief executive of the life insurer Legal & General.

It has responded by rejecting Mr Prosser's demand for a tax on stock lending – such a move would be beyond its remit – and by saying it remains unconvinced that short selling is distorting the market.

However, the organisation has stepped up its monitoring of stock lending, requesting daily information from Crest, the UK's share settlement company, which calculates the value of shares which have been lent out.

This is not believed to have shown an upward trend, either over recent months, or in the weeks covering the stock market's latest nosedive.

Stock lending is a lucrative sideline for fund managers and custodians of share certificates, while the hedge fund industry argues its activities create greater liquidity and contribute to a more efficient market, where share price floors – the levels at which they attract buyers – are discovered more quickly.

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