UK's FSA Discusses Short-Selling Transparency

by Justin Gorringe, Tax-News.com, London

16 September 2002

The long-lasting bear market has seen pressure from corporate executives and equity fund managers, wounded in the share-price or the pocket, for controls over short-selling, which they claim exacerbates volatility in the market-place and gives hedge funds (everyone's favourite bogey) the means to damage respectable stocks.

Although most economists and the more level-headed market operators understand that short-selling is a necessary and even beneficial part of market operations, which probably reduces rather than increases volatility, Britain's regulatory agency, the Financial Services Authority, has been studying the issue, and met corporate and hedge fund executives last week to consider ways in which more the practice of short-selling could at least be made more transparent.

The FSA said that no-one present spoke out in favour of a ban, or restrictions, on short-selling but that: "There was a clear message that the FSA and market participants need to establish who the disclosure is for, and what information would be useful, before the different options can be considered properly."

FSA chairman Sir Howard Davies said: "Not surprisingly, people tend to be much more concerned about short- selling in a bear market." But he is not against the practice, saying: "The FSA views short-selling just like any other investment activity and not as an abusive activity unless used as part of an abusive strategy."

"As I have said before, we have not so far seen a persuasive case for restrictions, or a prohibition, on short-selling. But we are sympathetic to increasing the amount of information that is available to the market on the level of short-selling, or at least of securities lending."

The most likely proxy for short-selling, which is hard to measure directly, is the level of stock-lending. To sell a stock short, the seller has to borrow the shares, and there is a well-developed stock-lending sector in London, whose levels of activity would tend to march with the level of short selling.

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