UK: FSA bans short-selling of the shares of quoted financial institutions

In an attempt to promote more orderly markets, the UK's Financial Services Authority has introduced, with effect from midnight tonight, a ban on the short-selling of shares in quoted financial institutions. In addition, and with effect from 23 September, daily disclosure will be required of all net short positions in excess of 0.25% of the ordinary share capital of such companies on the previous working day. These rules are being introduced in the FSA's Code of Market Conduct and will remain in force until 16 January 2009 (although they will be reviewed in 30 days' time).  A comprehensive review on short selling will be published in January 2009. 

According to the FSA's chief executive, Hector Sants:

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".

Note: in the USA, the SEC has introduced further rules governing naked short-selling - click here for the SEC press release. These rules introduce a permanent ban on the abusive naked short selling of all listed stocks, described by the SEC as:

In an ordinary short sale, the short seller borrows a stock and sells it, with the understanding that the loan must be repaid by buying the stock in the market (hopefully at a lower price). But in an abusive naked short transaction, the seller doesn't actually borrow the stock, and fails to deliver it to the buyer. For this reason, naked shorting can allow manipulators to force prices down far lower than would be possible in legitimate short-selling conditions".

Update (19 September 2008): the FSA has published the list of institutions to which the rules apply - see here.  The amendments to the Code of Market Conduct have been published here.

Update 2 (19 September 2008): the Australian Securities Exchange has announced that naked short selling will be prohibited from the opening of trading on 22 September. 

Update 3 (26 September 2008): the FSA has published FAQs here.