If the proposals, released in a discussion paper on Friday 6 February, are adopted, they would represent a huge expansion of the current system, imposed in September last year, under which short positions are disclosed in a specific set of financial stocks.
The FSA favours an international approach and is keen to seek support for its proposal. “Enhanced disclosure across the whole market is the right way forward,” said Sally Dewar, FSA managing director of wholesale and institutional markets, in a statement. “It’s also “important that we align our proposals with those being developed on an international basis.”
The news of the FSA’s proposal comes little more than a week after Paulson & Co, one of the world’s biggest hedge funds, announced it had made a profit of at least £270m betting on a fall in the share price of Royal Bank of Scotland over the past four months.
Many financiers predicted that the scale of Paulson’s profits – on a bank now 68% owned by the UK government - would reignite the debate about the merit of short selling, through which investors aim to profit from price falls by borrowing a stock and selling it, in the expectation that the price will fall before they have to buy it back to return it. According to a regulatory filing, New York-based Paulson & Co, run by billionaire John Paulson, covered its short position in RBS on Friday 23 January, thereby dropping below the US’s 0.25 per cent disclosure limit
The discussion paper – which is open for consultation – comes at the end of the regulator’s four-month ban on shorting financial stocks, which was put in force as stock values plummeted in September 2008. While the general ban was allowed to lapse in January because the market was seen to be stable, the disclosure on positions worth 0.25% remains in place for stocks on the FSA’s list.
The FSA has made it clear that it acknowledges the benefits of short selling in normal markets, including price efficiency and liquidity, but sees significant advantages in having enhanced transparency at this time. While the FSA is not proposing that there should be direct restrictions on short selling, some fear that the transparency proposal as it stands will deal a hefty blow to London’s beleaguered hedge fund industry.
