The UK’s Financial Services Authority has banned short-selling in all financial instruments for the next 120 days.
A statement issued after the end of trading in London said new rules would prohibit “the active creation or increase of net short positions in publicly quoted companies” from midnight on 18 September.
In a speech to the Lord Mayor’s City Banquet at the Mansion House, FSA chairman Callum McCarthy said the new provisions to the regulator’s code of conduct would also require “the disclosure of short positions on a daily basis in respect of financial institutions”.
McCarthy said the FSA would review both the effectiveness of the emergency rule “and the general policy we wish to adopt in respect of short-selling more generally”.
“This measure reflects the present turbulence in markets,” said McCarthy. “It is designed to have a calming effect – something which the equity markets for financial firms badly need.
I hope that practitioners will support both the ambition and the chosen means of achieving it.”
Short-selling had been widely blamed for the recent large falls in the stock price of UK and US banks considered over-reliant on wholesale funding. The US Securities and Exchange Commission also brought new rules on short selling into force this week. Rules to outlaw ‘naked’ short-selling – i.e. when traders sell stocks before buying them, then look to cover positions immediately afterwards – came in to force today. In addition, SEC chairman Cox has asked the commission to consider “on an emergency basis” a new disclosure rule that would require hedge funds and other large investors to disclose their short positions.
“There is a danger in a trading system which allows financial institutions to be targeted and subject to extreme short selling pressures, because movements in equity prices can be translated into uncertainty in the minds of those who place deposits with those institutions with consequent financial stability issues,” said the FSA’s McCarthy. “We have seen acute examples of this phenomenon in both London and New York this week.”