FSA plans to repeal ban on financial short-selling

The Financial Services Authority yesterday said it plans to repeal a ban on short-selling financial stocks later this month, but wants to maintain disclosure requirements for the practice.

The FSA said in June that companies should announce short positions in more than 30 stocks in the financial sector. On 18 September, it implemented a complete ban on the practice, applying to the same stocks.

Short-selling is a procedure used by hedge funds to profit from an expected fall in the price of a company's shares. In a short sale, the hedge fund borrows a stock and sells it on, before buying it again a few days later – theoretically at a lower price – and returning it to the original owner while pocketing the price difference.

The FSA banned the practice following the bankruptcy of the US bank Lehman Brothers because it was seen as a possible cause of falling share prices among banks when these were viewed as undermining the UK's financial system. But the continued fall of banking shares – prompting the Government's bailout in October – has led many to view the ban as unnecessary and ineffective.

The ban is due to expire on 16 January and the FSA is allowing parties to submit views on yesterday's proposal by Friday. While the disclosure requirements on short positions initially applied to any change in these above 0.25 per cent, they are under the new FSA proposals being relaxed to only apply to moves of 0.1 per cent or more.