FSA demands short selling disclosure for stocks doing rights issues
June 18, 2008admin No Comments »The FSA is going to make investors disclose short positions in stocks undertaking a rights issue if they amount to an interest above 0.25%.
This applies to investors short selling, or who hold instruments such as contracts for difference or spread bets which give rise to an equivalent economic interest, and comes into effect on Friday 20 June. Investors will have to disclose positions above 0.25% via a Regulatory Information Service by 3.30pm the following business day.
The FSA said it is introducing the measure because in current market conditions there is increased potential for market abuse through short selling during rights issues, and this has resulted in severe volatility in the shares of companies conducting rights issues.
These include FTSE 100 banks Royal Bank of Scotland, Bradford & Bingley and HBOS, whose shares plummeted 17% on 19 March. The FSA put this down to unfounded rumours about UK financial institutions in the London market sometimes accompanied by short selling.
This was before HBOS announced its rights issue on 29 April.
The FSA also said that 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.
David Buik of Cantor Fitzgerald said: “Basically speaking you have to respect what the FSA are doing but to expect too much out of this is unrealistic. In a free market people have the right and ability to express opinions, and whether you can prove someone is doing it for insider reasons is very hard.”
“There has been a lot of discussion of this in recent weeks but inevitably as the public loses confidence you can expect short selling.”
He also stressed that CFDs and spread bets are already highly regulated.
Guy Sears, director of wholesale at the Investment Management Association (IMA) stated: “IMA, whose firms manage 45% of the equity market, welcomes the FSA’s leadership in this difficult area. Manipulating rights issues is not a game; it damages the wider economy and jeopardises mid-term recovery.”
“Banks have been told to come clean and raise capital where needed. Rights issues should be the mechanism of choice.”
“Shorting so as to suppress the share price below the underwritten price, knowing this will force underwriters to sell at a discount, is fuelled by an absence of transparency. If banks cannot raise capital, house-builders and other major contributors to the economy will suffer.”
“It will no doubt surprise many that the FSA has changed the rules at such short notice and it will cause operational headaches in the short-term; but that is a price that a few short-sellers, and not the FSA, have forced upon the market in these exceptional times.”
The action is part of a FSA review into how capital raising by listed companies can be made more orderly and efficient. The regulator also wants to implement immediate measures to maintain market confidence and prevent potential abuse during rights issues.
The FSA said volatility during an issue is potentially damaging not only to the issuer but also to confidence in the overall fairness and quality of the UK market, and can be particularly prejudicial to the interests of small investors.
The problem is compounded by the length of time taken to complete rights issues.
The FSA believes that improving the transparency of significant short selling in such shares would be a good means of preventing the potential for abuse.
In addition to the new disclosure regime, the regulator is considering whether it might be necessary to take further measures such as 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.
Buik said: “I would be against any restriction but in fairness 0.25% is a substantial amount of a quoted company. But restrictions on amount are not good for the market as a whole.”
The Alternative Investment Management Association (AIMA) is unhappy with the FSA provisions. It said the industry is surprised that this measure has been introduced without any prior consultation.
Andrew Baker, deputy chief executive officer of AIMA stated: “The FSA has an obligation to follow a consultation process with industry when new measures of this nature are set to be introduced. 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.”
But the FSA asserted that it views short selling as a legitimate technique which assists liquidity and is not in itself abusive.
Comment: I haven’t really got any problem with the idea of disclosure (though why should the threshold for short positions be 0.25% when that for longs is 3%?). However, it’s a bit rich for the FSA to blame short sellers for the banks’ (and maybe the housebuilders’) big price falls. Could it be that it’s not short selling that makes the price fall, rather it’s the poor decisions made by the companies concerned, e.g. massive over-borrowing (in the case of Barratt) and well-documented failures on the part of the banks? Short sellers have spotted the problems in these companies balance sheets and are taking advantage of that to make a profit. Not essentially different from those who spot good companies and make money on the price rising. I.e. it’s not short sellers that have created the problems that the banks and the housebuilders face.
Market abuse and manipulation is almost built into the markets, and is not specific to short sellers – it happens in both directions. The FSA in itself said that short selling is a legitimate technique, which assists liquidity and is not in itself abusive.
Tags: FSA, rights issue, short positions, spread bets
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