FSA Finds No Evidence Of Increased Short-Selling

by Carla Johnson, Investors Offshore, London

23 July 2002

The UK's Financial Services Authority (FSA) said on Monday it had found no rise in short selling during recent market falls, despite calls in the media for the practice to be somehow regulated or curbed.

"We have done some initial analysis which does not suggest an increase in short-selling recently. We do not see short-selling as a problem," Kate Burns, spokeswoman for the FSA told Reuters.

German Finance Minister Hans Eichel in February called hedge funds a threat to financial stability and urged a temporary ban on short-selling, while Japan in March introduced a package of measures aimed at restricting short selling and stock lending.

Writing in yesterday's Financial times, David Varney, executive chairman of mobile phone group mm02 OOM.L , claimed that short selling had become a significant factor in the UK equity market. "Many in the markets and industry believe aggressive short selling is damaging interests of long-term investors," he said.

Varney said that in the eight months since his own company's demerger from British Telecom BT.L , more than 1.6 times the number of shares it had in issue had been traded on the London Stock Exchange, despite little substantive change in the shareholder registrar, adding: "It's right to question whether institutions that engage in stock lending to hedge funds are behaving in a prudent or responsible way, given that such lending may work against their own interest and that of those whose money they manage."

David Prosser, Chairman of insurer Legal and General, recently suggested putting a tax on short-sellers. But these gentlemen are talking out of their pockets: more objective observers mostly agree that short-selling adds to market liquidity and can even have a role in limiting volatility. If a company is vulnerable to being shorted, it's because of underlying weakness which will show itself sooner or later, they say.

The FSA responded last week in a letter signed by Michael Foot, FSA managing director for deposit takers and markets, who said the watchdog "has found no clear evidence of an upturn in short selling in recent months." Ms Burns says that the FSA was keeping an eye on stock lending, using information from Crest, Britain's share settlement company which calculates the value of shares which have been lent out.

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