Shorting Disclosure Requirements and Restrictions

Q. Can't place a sell order due to underlying restrictions - what's that about?


A: It means that the percentage of stock being temporarily loaned, usually by larger shareowners, for use by shorters temporarily selling it, has already been fully utilised. If the bookie cannot access any loaned stock with which to take a short position in the market, he is unlikely to offer you a downbet.

Some bookies take an underlying market position for every bet. Some don't. Some do so with certain stocks. Certain stocks are quite frequently unavailable for shorting - in some cases there is a queue of people waiting to short as soon as loan stock becomes available.

Q. Won't the shorting ban hurt spread betting companies?

Say for spread betting provider IG Index (IGG). Surely volumes next year will be way down over 2008/2009?

A: Will they? Or will greater geographic expansion compensate? I imagine they must lose out if shorting is tightened, as that facility is one of their greatest marketing points. Though I guess all the spread betting firms will concentrate on offering a more tempting array of index-trading instruments, to help replace unavailable stocks.

Note: The ban on short selling financial stocks has now been lifted by the FSA but hard-to-borrow shares like LLoyds may turn out to be expensive to short; stocks which are hard to borrow incur a daily borrowing cost that might be as much as 1% of the consideration which is a lot (compare this to a stock like Vodafone (VOD) where the borrowing cost cost could be as low as 0.05%).

Q. Is spread betting subject to disclosure rules?

A: On 1 June 2009, the UK FSA brought into effect new rules in relation to disclosure of contracts for difference positions and other financial instruments (such as swaps, options or forward sale contracts) having a 'similar economic effect' the scope being to block covert stakes and enhance market transparency. To summarise, the new rules require that long contracts for difference positions be disclosed at an initial threshold of 3% of total voting rights with further disclosures triggering at increments of 1% (in the same way as shares currently are). These changes apply to UK incorporated companies with shares listed on a regulated market.

The normal rules for stock investors is that they have to notify the company (within 3 business days) when their holding reaches 3% of total voting rights and then of every 1% increase thereafter, or any subsequent 1% reduction until such time that the stock holding has fallen back below 3%. The company then has to disclose this information (within 2 days) to the market. These rules now also apply to shorting with the initial threshold for reporting a short position being at 0.25%.

A spread bet is essentially a contract for difference that is also considered a gaming contract. Depending on the terms of the spread bet, it may provide the holder a long position in relation to the economic performance of the shares. If this is the case, the spread bet will be disclosable by the party holding a long position if a 3% threshold is exceeded.

Here's an excerpt from City Index's terms and conditions:

Disclosure Rules

From 1 June 2009, the UK FSA are introducing new rules which widen the scope of the current disclosure obligations. When making a notification of a major shareholding (as defined by the FSA Disclosure Rules and Transparency Rules sourcebook) to an issuer Investors, wherever they are located, will be required to include their holdings of financial instruments which have a similar economic effect to qualifying investments, for example CFDs and spread bets. For further information regarding the new rules, please click here to see the FSA's final rules and please click here for Q&As.

Enhanced Disclosure Obligations

From the 19 April 2010 enhanced disclosure obligations will be faced by any individual who has a long interest of 1% or more of any relevant securities of a party to an offer governed by the UK Takeover Code. Please seek further information from the Takeover Panel if necessary.

Q. For normal stock trading how does it work regarding the declaration of a major interest in a quoted company?

My impression was that investors have to declare any interest in excess of a 3% holding. But if this is the case why do investors hide behind nominee companies? For instance, I note that British Airways has a number of shareholders each of whom hold more than 3% - Barclayshare Nominees,TD Waterhouse Nominees...etc

A: You are right on the 3%; companies do have to announce the presence of significant shareholders (significant defined as more than 3% of share issue). These rules apply to companies on the Official List traded on the London Stock Exchange's (LSE) Main Market and also to Aim companies. However, the companies themselves are not obliged to reveal the identity of the underlying investors and that is why you have got a list of broker nominee accounts. These nomineee shareholders are most likely a aggregation of a number of small retail private investors.

 ...Continues here - Isn't Spread Betting Risky and Unpatriotic!?

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