UK FSA's short-selling ban seen drastic but necessary

LONDON, Sept 19 Fri Sep 19, 2008 1:12pm EDT

LONDON, Sept 19 (Reuters) - Hopes that the UK Financial Services Authority's short-selling ban will soothe recent market jitters largely outweighed misgivings over the move, with most market participants seeing it as a drastic but necessary step.

The FSA on Thursday slapped an unprecedented four-month ban on short-selling financial stocks, saying the measure was needed to shore up confidence in UK banks after persistent falls in their share prices threatened to undermine consumer confidence in them.

Short sellers -- who sell borrowed stock in the hope its price will fall, allowing them to buy it back more cheaply -- have been criticised for aggressively targeting banks including HBOS HBOS.L, which on Wednesday accepted a takeover bid from rival Lloyds TSB (LLOY.L) following a dramatic slump in its shares.

"In a climate of fear and panic, (the ban) looks like a sensible move. It was becoming too easy for the market to get spooked, and short-selling was becoming a self-fulfilling prophecy," said Daniel Havercroft, financial stocks analyst at Investec.

FUNDS ACTION

The FSA ban came amid signs that traditional fund managers and pension funds -- who frequently lend shares to short-sellers -- had turned against the practice.

On Wednesday, Reuters reported that a consortium of fund managers was discussing sending an open letter urging the authorities to act against short-sellers. On Friday, Britain's largest pension fund, the 39.7 billion pound BT Pension Scheme, said it had banned stock lending for 20 British and global financial companies.

Martin Gilbert, chief executive of fund manager Aberdeen Asset Management (ADN.L), told Reuters on Friday that the ban was justified by the need to stabilise the banking sector.

"The ban is a bood idea and it will help. I think the fiancial stability of the banking sector is more important than anything else," Gilbert said.

Also on Friday, the U.S. Securities and Exchange Commission in turn halted short-selling in financial stocks until Oct 2, while regulators in Ireland, Switzerland, Australia and other countries also followed suit to varying degrees.

The global short-selling clampdown, coupled with news that the U.S. government is working on a plan to absorb hundreds of billions of dollars in bad debt from banks' balance sheets, fuelled an explosive rally in financial stocks.

By by the close of trading in London, shares in UK lenders Royal Bank of Scotland (RBS.L), Barclays (BARC.L), HBOS HBOS.L and Lloyds TSB (LLOY.L) were up by between 20 percent and 32 percent.

CAPITAL COSTS

However, the hedge fund industry, responsible for a high proportion of short-selling activity, said the short-selling freeze could make it more expensive for banks to raise capital, and called on the FSA to review the ban as soon as possible.

"Banning short-selling of financial stocks, while it may indeed bring temporary relief, creates an artificial market. It will not ultimately, on its own, bring back investor confidence in the banking system," said Florence Lombard, Chief Executive of hedge fund lobby group the Alternative Investment Management Association.

Some market participants also saw the short selling ban as an unjustifiable infringment of their freedom to trade, irrespective of the banking sector's troubles.

"(The ban) is a step towards a totalitarian state. If you can restrict peoples' freedom to buy and sell shares, why not restrict their freedom to walk around after 9 pm?" said James Hamilton, banks analyst at Numis Securities.

For a separate story on the impact on hedge fund trading strategies please double-click on [ID:nLJ599293] (Reporting by Myles Neligan; Editing by Hans Peters)

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.