The Financial Services Authority (FSA) and Securities Exchange Commission (SEC) have taken strong action to curtail abusive short selling in an effort to stabilise the financial markets. Below is a summary of the current action taken by the FSA and SEC. Further action from both regulators is expected.

SEC Announcement

On 17 September 2008, the SEC issued an emergency order adopting a new temporary rule imposing restrictions designed to curb naked short selling and the resulting delivery failures and a new anti-fraud rule applicable to short sellers who fail to deliver securities by the delivery date (Short Selling Emergency order).

The Short Selling Emergency Order, which applies to all transactions in equity securities effected, cleared or settled by or through any US registered broker-dealers or clearing agencies, took effect on 18 September 2008 and expires, unless extended, on 1 October 2008. It does not apply to transactions effected on non-US markets that are not cleared or settled through US registered broker-dealers or clearing agencies.

SEC Chairman Christopher Cox indicated that the SEC would be expanding its enforcement efforts to "obtain disclosure from significant hedge funds and other institutional traders of their past trading positions in specific securities. Those institutions will also be required immediately to secure all or their communication records in anticipation of subpoenas for these records."

The announcement is available on the SEC website

FSA Announcement

On 18 September 2008, the FSA announced that it would be introducing new prohibitions and disclosure obligations in relation to short selling. As of 18 September 2008, the new provisions in the Code of Market Conduct will serve to prohibit the active creation or increase of net short positions in publicly quoted financial companies.

In addition, from Tuesday 23 September the FSA will require daily disclosure of all net short positions in excess of 0.25% of the ordinary share capital of the relevant companies held at market close on the previous working day (including such positions held at close on Friday 19 September).

The FSA will continue to monitor the market to determine whether it will be necessary to extend this approach to others sectors.

These provisions will remain in force until 16 January 2009, although they will be reviewed after 30 days. A comprehensive review of the rules on short selling will be published in January.

In the FSA statement, 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.'

The FSA material is available here:

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