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FSA to require disclosure of short positions in companies undertaking rights issues

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The UK’s Financial Services Authority is introducing new rules requiring disclosure of short positions above a certain threshold in companies undertaking rights issues, in order to reduce

The UK’s Financial Services Authority is introducing new rules requiring disclosure of short positions above a certain threshold in companies undertaking rights issues, in order to reduce the scope for market abuse.

The move, which follows concern over market volatility surrounding the rights issues launched by mortgage banks Bradford & Bingley and HBOS, may be followed by other measures, including restrictions on the lending of stock of securities in rights issues for short selling, and restricting the covering of short positions by acquiring rights to newly-issued shares.

However, the move has been met by ‘disappointment’ on the part of hedge fund industry body the Alternative Investment Management Association, which has expressed its regret that the FSA did not consult with the industry before introducing the measure.

In current market conditions, the FSA says, there is increased potential for market abuse through short selling during rights issues. The severe volatility in the shares of companies conducting rights issues – notably in the case of HBOS, where short sellers are suspected of being instrumental in the bank’s share price falling below the rights issue price – is potentially damaging not only to the issuers in question but also to confidence in the overall fairness and quality of the UK market, the regulator says, noting that the problem is compounded by the length of time taken to complete rights issues.

While a review is planned to examine how capital-raising by listed companies can be made more orderly and efficient, the FSA says it has also been considering what immediate measures can be taken to maintain market confidence and prevent potential abuse during rights issues.

‘The FSA views short selling as a legitimate technique which assists liquidity and is not in itself abusive,’ the regulator says. ‘But the rights issue process provides greater scope for what might amount to market abuse, particularly in current conditions.

‘We consider that, in the first instance, improving transparency of significant short selling in such shares would be a good means of preventing the potential for 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.’

The FSA is introducing new provisions in its Code of Market Conduct that will come into effect from Friday, June 20, requiring the disclosure of significant short positions in stocks admitted to trading on prescribed markets that are undertaking rights issues.

A significant short position is defined as 0.25 per cent of the issued shares achieved via short selling or by any instruments giving rise to an equivalent economic interest. Investors will be obliged to disclose positions exceeding the threshold to the market by means of a Regulatory Information Service announcement by 3.30 p.m. the following business day.

The regulator says the new provisions and especially the level of the threshold triggering disclosure of a short position will be kept under review and may be subject to change, and it will also assess the overall effectiveness of the measure.

‘In addition to the new disclosure regime, we are also giving consideration to whether it might be necessary to take further measures in this area,’ the FSA says. ‘We are currently examining a number of options including the 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.

However, the Alternative Investment Management Association has expressed its disappointment with the new provisions in the FSA’s Code of Market Conduct regarding short-selling, saying that the regulator may have set an awkward precedent.

While it supports all appropriate measures that prevent market abuse and offer consumer protection, Aima says, the industry is surprised that this measure has been introduced without any prior consultation.

The association believes there is insufficient information to allow proper consideration and implementation of these measures. Moreover, the provisions are due to come into effect on June 20, giving the industry almost no time to prepare.

‘The FSA has an obligation to follow a consultation process with industry when new measures of this nature are set to be introduced,’ says Aima deputy chief executive Andrew Baker. ‘This measure appears to be in response to the need to recapitalise the banking system.

‘This seems to be a rushed measure to assist a single sector and undoubtedly sets an awkward precedent for the future. We will be consulting with our membership and submitting a detailed response itemising our concerns to the FSA.’

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