Global crackdown on short selling intensifies

WASHINGTON/LONDON (Reuters) - The UK Financial Services Authority imposed a temporary ban on short-selling financial stocks on Thursday, saying the measure was needed to prevent further instability in the financial sector.

The move came as New York began a probe into illegal short- selling of Wall Street firms and as the U.S. Securities and Exchange Commission toughened its short sale rules, in a crackdown on traders who bet stocks will fall.

Under the FSA ban, investors will be barred from taking new short positions or adding to existing ones in financial shares from midnight (7 p.m. EDT) on Thursday Sept 18.

The ban will remain in force until January 16, 2009 and will be reviewed after an initial period of 30 days, the FSA said.

The move, the strictest major-market clampdown on short- selling to date, comes hours after British bank Lloyds TSB Group Plc agreed to buy rival HBOS Plc in a rescue takeover following a dramatic fall in the HBOS share price earlier this week.

The measure underscores growing concerns that short-selling -- in which an investor sells borrowed stock in the anticipation the price will fall, allowing the stock to be bought back more cheaply -- has exacerbated sharp declines in UK banking stocks since the onset of the credit crunch.

The trading technique has also been cited as a cause of the recent fall in U.S. financial sector stocks.

STABILITY THREAT

FSA Chairman Callum McCarthy said short-selling posed a potential threat to banks because it could trigger confidence- sapping declines in share prices, which might in turn prompt savers to withdraw their cash.

"There is a danger in a trading system which allows financial institutions to be targeted and subject to extreme short-selling pressures, because movements in equity prices can be translated into uncertainty in the minds of those who place deposits with those institutions," he said in a speech delivered late on Thursday.

"This is a measure which reflects the present turbulence in markets. It is designed to have a calming effect -- something which the equity markets for financial firms badly need."

The outright ban on short-selling follows a requirement, introduced by the FSA in June, for all investors taking significant short positions in companies launching rights issues to declare their holdings. That restriction was imposed after persistent share price falls threatened to derail fund- raising by HBOS and fellow lender Bradford & Bingley.

SEC ACTION

On Wednesday, amid intense political pressure to curb short selling in major banks, the SEC issued rules requiring short sellers and their broker-dealers to deliver securities by the close of the business on the settlement date, three days after the sale.

The SEC is also considering requiring hedge funds and large investors to disclose short positions. Managers with more than $100 million invested in securities would be required to publicly report their daily short positions.

It was unclear whether the SEC would issue the rule on an emergency basis. Short sellers and the U.S. hedge fund community were dismayed with the potential new rule.

Well known short seller Jim Chanos said it was akin to the government suddenly requiring Coca-Cola to disclose their secret formula for free to all their competitors.

Richard Baker, president of hedge fund group the Managed Funds Association, said his members were concerned the FSA and SEC actions could hurt markets and throw them into disarray.

Baker told reporters on a call that he had relayed his concerns to SEC Chairman Christopher Cox.

Baker said there was a possibility the disclosure rule could be issued before the close of business on Thursday, or close of business for the week.

Republican presidential candidate John McCain has blamed Cox for failing to police Wall Street and said if he were president he would fire him.

Other senior lawmakers have pressed the SEC to curb short selling of Wall Street firms.

Chancellor of the Exchequer Alistair Darling welcomed the FSA's ban.

"I believe it is the right thing to do in the current market conditions and in the interests of financial stability," he said in a statement.

In addition to the ban on new short-selling, investors with an existing short position of more than 0.25 percent of a financial company's share capital must disclose their holdings every day from September 23, the FSA said.

The proportion of HBOS stock on loan, seen as a reliable indicator of short-selling volumes, peaked at about 2.75 percent on Monday, compared with about 5 percent for Barclays Plc and 2.7 percent for HSBC Holdings Plc, according to figures from research firm Data Explorers.

(Additional reporting by Rachelle Younglai in Washington and Emily Chasan in New York; editing by Leslie Gevirtz and Andre Grenon)