The FSA has introduced a new code of conduct to crack down on market abuse through short selling in companies undertaking rights issues.
In response to the recent severe volatility in shares of companies conducting cash calls, from Friday next week the regulator will enforce disclosure of significant short positions in stocks.
It says a “significant short position” is defined as 0.25% of the issued shares achieved via short selling or by any instruments leading to an equivalent economic interest.
The FSA says participants exceeding the threshold will be the obligated to disclose positions to the Regulatory Information Service by 3.30pm the following business day.
Lender HBOS has come under sever pressure in recent days after a sharp sell-off plunged its share price below the 275p level the group set as its rights issue value.
The FSA says the current market conditions lead to “increased potential” for market abuse through short selling during rights issues.
“This is potentially damaging not only to the issuers in question but also to confidence in the overall fairness and quality of the UK market,” it says.
“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 regulator says it will continue to monitor and review the new measures, including the short position threshold.
“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,” it says.
“We are currently examining a number of options including the following: 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, CMS Cameron McKenna partner Simon Morris has criticised the move, saying it will "change the geography" of the market.
"In one sentence FSA says that short selling is a legitimate technique and in the next claims it could lead to market abuse," he says,
"The argument is neither consistent nor a thought-through response to a perceived problem. If there are abuses taking place then there are rules already in place to deal with them."
"Disclosure will require traders to put their cards on the table face-up; FSA might as well tell hedge fund managers and other investment managers to publish their strategies and place them on their websites."IFAonline
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