Page last updated at 04:20 GMT, Friday, 19 September 2008 05:20 UK

FSA introduces short-selling ban


What is short-selling?

The City regulator has announced a ban on short-selling - in which traders bet on share prices falling - in a bid to tackle market instability.

The Financial Services Authority (FSA) is clamping down on what some think contributed to the sharp falls in HBOS shares before Lloyds TSB rescued it.

The rule came into force at midnight and is due to last until 16 January.

The FSA's clampdown applies only to 29 leading financial stocks, and not to shares in all listed firms.

The restrictions will be reviewed after 30 days.

"While we still regard short-selling as a legitimate investment technique in normal market conditions, the current extreme circumstances have given rise to disorderly markets," said FSA chief executive Hector Sants.

'Financial stability'

Short-selling is a technique that sees investors borrow an asset, such as shares, currencies or oil contracts, from another investor and then sell that asset in the relevant market hoping the price will fall.

There is a danger in a trading system which allows financial institutions to be targeted and subject to extreme short-selling pressures

Callum McCarthy
Financial Services Authority chairman

The aim is to buy back the asset at a lower price and return it to its owner, pocketing the difference.

Anyone can short a position in a company's shares, but typically hedge funds are the main players.

Chancellor Alistair Darling welcomed the move by the FSA.

"I believe it is the right thing to do in the current market conditions and in the interests of financial stability," he said.

Markets have fluctuated hugely in recent days, with fundamental changes occurring in the financial landscape.

There are fears that several firms, including Lehman Brothers, which filed for bankruptcy at the start of the week, and insurance giant AIG, which was rescued by the Federal Reserve, were targeted by those short-selling.

Chancellor Alistair Darling says short-selling wasn't the sole cause of falling global stock markets

Speaking to the BBC, Mr Darling underlined that short-selling was not wrong in itself.

"It can help actually in providing funds, liquidity, for companies."

But he added that it could become a problem where people "deliberately" manipulate a market, making "a difficult situation even worse".

Callum McCarthy, chairman of the Financial Services Authority, expressed concerns over recent volatility.

"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."

Broader moves

It was not only in the UK that attempts were being made to address short-shelling.

The US financial regulator, the Securities and Exchange Commission (SEC), also announced restrictions on short-selling on Wednesday.

And on Thursday, New York attorney general Andrew Cuomo said he would start a probe into short-selling.

At issue is whether certain traders exploited short-selling to push down stock prices, breaching market rules.

New York's state pension funds said it would cease lending stocks in 19 firms to short-sellers on a temporary basis.

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