The US Securities and Exchange Commission (SEC) and the UK Financial Services Authority (FSA) have taken temporary and concerted emergency action to prohibit short selling in financial companies.
The prohibition bans the creation of a new net short position or an increase in an existing short position in publicly quoted financial companies. It applies to both naked and covered short-selling.
SEC Provisions
With regards to the US, the SEC action affects short selling in 799 financial institutions and is effective until 2 October 2008. The order may be extended beyond 10 days but not for more than 30 calendar days in total duration.
The SEC also has instituted the following:
Firstly, temporarily requiring that institutional money managers report their new short sales of certain publicly traded securities. These money managers are already required to report their long positions in these securities.
Secondly, temporarily easing restrictions on the ability of securities issuers to re-purchase their securities. This change will give issuers more flexibility to buy back their securities, and help restore liquidity during this period of unusual and extraordinary market volatility.
FSA Provisions
In the UK, the provisions of the FSA affects short selling in 29 financial institutions and will remain in force until 16 January 2009 but will be reviewed after 30 days. The FSA additionally requires any net short positions in excess of 0.25% of the companies' ordinary share capital to be disclosed on a daily basis effective from 23 September 2008.
Hector Sants, chief executive of the FSA, said: "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."
