MPs are concerned that the recently lifted ban on holding short positions in financial stocks has led to renewed instability in the sector.
In an open letter to the FSA's chief executive, Hector Sants, the Treasury Select Committee urged the regulator to monitor the situation.
On 16 January, the FSA lifted its temporary ban on taking new short positions in a number of UK financial shares. However, investors are still required to disclose any significant positions.
Following dramatic falls in bank shares this week, Committee chairman John McFall MP says he is worried about the actions of hedge funds.
The letter says: "In the light of the extreme market turbulence in bank shares in the week since the ban was lifted, could you [Sants] please confirm that the Financial Services Authority is actively monitoring the connection between the volatility in bank shares and the repeal of the ban on short selling.
"I am particularly concerned given that I have heard disturbing anecdotal evidence that some hedge funds have been shorting stocks in UK banks."
McFall also asked the FSA to confirm it would re-instate the ban immediately if it believes short selling is causing the current instability in the UK financial sector.
Shares in Royal Bank of Scotland tumbled 67% on Monday, while Barclays hit a 24-year low today, but it is unclear whether this has been caused by a new Government bailout plan or short selling by hedge funds.
The Treasury Committee is due to meet with a number of hedge fund representatives on Tuesday 27 January.
Contact: John Bakie, Tel: 020 7484 9805, e-mail: [email protected]IFAonline
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