FSA bans short-selling

The Financial Services Authority (FSA) announced that it will ban short-selling of publicly listed stocks until January 16th, 2009 for the UK market where it is the financial regulator. It will then be reviewed.

From The Financial Times:

Hector Sants, chief executive of the FSA, said: “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. As a result, we have taken this decisive action, after careful consideration, to protect the fundamental integrity and quality of markets and to guard against further instability in the financial sector.�

The articles I read gave contradictory reports as to whether this covered all stocks or just a subset of financial stocks, but it appears that it may just be financials at this point with the possibility of being extended if the FSA feels it necessary. The decision will also be reviewed in 30 days time.

Limiting short-selling sounds pretty extreme to me. Limiting it for such an extended period? I can’t imagine the impact that this will have on hedge fund operators, particularly in the long/short space. Market neutral funds may need to substitute pair trading for shorting the index. (I’m taking a wild guess that shorting the index or at least going short index futures will still be allowed.)

Yes, I think we’ll blame the massive over-extension of credit, with risk concentrations and the careless selling of large amounts of credit default swaps by insurers on the hedge funds. I call scapegoat alert.

Published by David Kirk

The opinions expressed on this site are those of the author and other commenters and are not necessarily those of his employer or any other organisation. David Kirk runs Milliman’s actuarial consulting practice in Africa. He is an actuary and is the creator of New Business Margin on Revenue. He specialises in risk and capital management, regulatory change and insurance strategy . He also has extensive experience in embedded value reporting, insurance-related IFRS and share option valuation.

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