The financial industry’s watchdog made good on its threats to deal with the problem of short-selling financial stocks by imposing a temporary ban on the practice.
The Financial Services Authority (FSA) said in a statement that active creation and increasing short positions in financial stocks would be prohibited. The measure will stay in place until January 16, with a review to be carried out after 30 days. In a further move from September 23, all short positions above 0.25% of the ordinary share capital of the relevant companies must be disclosed daily.
The FSA also said that it “stands ready” to extend the ban on shorting to other sectors if it judges it necessary.
Speaking at the Lord Mayor’s City Banquet last week, Callum McCarthy, chairman of the FSA, explained the association’s decision.
“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,” he said.
“This is a measure which reflects the present turbulence in markets. It is designed to have a calming effect – something which the equity markets for financial firms badly need.”
The Investment Management Association was cautiously supportive of the move. In a statement it said that although “short selling of bank shares is neither the sole nor the principal reason for the falls in the price of certain shares in recent weeks” it was advising member firms to consider carefully the implications of lending British bank shares in the current climate.