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UK regulator proposes public disclosure of short selling for all stocks

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The Financial Services Authority has proposed expanding its disclosure rule covering short positions in financial stocks into a general short selling public disclosure requirement for all

The Financial Services Authority has proposed expanding its disclosure rule covering short positions in financial stocks into a general short selling public disclosure requirement for all UK-listed stocks.

The UK regulator says the proposals have been drawn up following a comprehensive review of short selling undertaken since the FSA introduced its temporary ban on shorting of financial stocks last September.

After the temporary ban expired on January 16, the FSA extended the requirement for the disclosure of net short positions in financial stocks exceeding 0.25 per cent of a firm’s issued share capital until June 30.

The new proposals would raise the threshold for disclosure for a short position to 0.5 per cent of the capital of the company in question, followed by further disclosures at additional increments of 0.1 per cent.

However, the threshold would remain at 0.25 per cent in the case of companies undertaking a rights issue, because the FSA believes that ‘companies undertaking rights issues are more vulnerable than the generality of securities to short selling’.

A discussion paper issues by the FSA looks at the arguments for and against short selling, examines possible regulatory constraints on short selling and hen examines options for enhanced transparency. The paper poses a number of questions on each of these areas and is asking for responses by May 8 to assist the authority in formulating a regulatory response.

The FSA believes that the benefits of short selling such as price efficiency and liquidity normally outweigh the disadvantages, such as facilitating market abuse and potentially contributing to disorderly markets, and proposes that there should be no direct restrictions on short selling, such as a blanket ban, a ban restricted to ‘naked’ short selling, circuit breaker mechanisms or US-style uptick rules.

However, the authority sees advantages in having enhanced transparency of short selling and so proposes that disclosure requirements for significant short positions should be introduced for all UK listed stocks.

It has come down against the alternative idea of disclosure of aggregate short positions because it does not believe that the benefits of such a system would justify the very high costs to the market of implementing a marking or flagging system.

The FSA notes that regulators around the globe have put in place a variety of measures affecting short selling, and that both the International Organisation of Securities Commissions and the Committee of European Securities Regulators have working groups on short selling.

The UK regulator believes that international consensus on the key issues is extremely important and is actively contributing to the work of both groups supported by its findings from this review. For this reason, it says, it is not at present setting out a detailed blueprint for a disclosure regime but will use the feedback from the discussion paper to inform the international debate.

‘This discussion paper offers the opportunity for market participants and others to contribute to the development of future policy,’ says Sally Dewar, the FSA’s managing director of wholesale and institutional markets.

‘We believe that enhanced disclosure across the whole market is the right way forward. 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.’

After the consultation period closes on May 8, the FSA says it will issue a feedback statement setting out its conclusions on a longer-term policy for short selling.

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