LONDON, Sept 19 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
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
"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
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
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
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
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)