The Financial Services Authority (FSA) may review the shorting techniques used by 130/30 funds in Britain.
Ucits III guidelines dictate funds must use synthetic instruments, derivatives, to short a firm in the portfolio.
However, the Irish Financial Services Regulatory Authority (Ifsra) has permitted the use of physical shorting in 130/30 funds. Julian Brown, partner, financial services at Eversheds, a City law firm, says the FSA is reviewing its position.
Brown says part of the motivation for a change is that many groups do not have the systems to deal in derivatives and as such may prefer to physically short a company.
However, he adds there may also be disadvantages: “By physically shorting a company a fund will have to borrow stock. There needs to be much thought on the effect on a fund’s portfolio of handing over part of it as collateral to a lender.”
The FSA confirmed to Fund Strategy that it is looking at the subject. A spokesperson said it is aware of the controversy surrounding it. The regulator says such a move would require a major rule change but that a consultation paper is not planned. Instead it expects the issue to be discussed by the Committee of European Securities Regulation (Cesr).
Meanwhile, the FSA last week announced that following “significant feedback”, it will deliver its report on the Retail Distribution Review (RDR) two months ahead of schedule.
The RDR discussion paper was originally to be published in June, but it will be released in April to give the industry an indication of where the review is heading.
The publication of a more detailed response, which will take into account all the regulatory implications, will follow in October. This will contain the full feedback received and the timetable for formal consultation on the changes.
However, while one consultation is ahead of schedule, another has fallen behind.
The FSA planned to issue a policy statement and final rules towards the end of this month to allow the development of Funds of Alternative Investment Funds (Faifs). But this has been delayed until early next year.