UK FSA bans shorting financial stocks, U.S. may too

By Myles Neligan/Rachelle Younglai

LONDON/WASHINGTON (Reuters) - The UK Financial Services Authority imposed a temporary ban on short-selling financial stocks on Thursday and the top U.S. securities regulator was said to be weighing a similar measure in a bid to stabilize stocks prices.

The U.S. Securities and Exchange Commission met late Thursday night, and a source briefed on the matter said a temporary ban on short sales of some, or all, stocks was being considered.

SEC Chairman Christopher Cox told reporters after a meeting with lawmakers on the current global financial turmoil that the agency would have more to say on short-selling rules "as early as tomorrow."

In another sign of a spreading crackdown on short sales, New York state began a probe into illegal short-selling in the shares of major Wall Street firms such as Goldman Sachs Group Inc and Morgan Stanley.

Under the FSA ban, investors will be barred from taking new short positions or adding to existing ones in financial shares from midnight British time 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.

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