The UK Financial Services Authority (FSA) is planning to restrict short selling of a company’s stock while it is undertaking a rights issue. The regulator is taking action to reduce the potential for market abuse.
With effect from 20 June, the regulator will introduce provisions into its code of market conduct which will require the disclosure of significant short positions in stocks of companies undertaking rights issues. The FSA defines a significant short position as “0.25% of the issued shares achieved via short selling or by any instruments giving rise to an equivalent economic interest”.
Any positions exceeding this threshold will need to be reported to the market through a regulatory information service by 15.30 the following business day.
The provisions and the threshold triggering a disclosure of a short position will be kept under review and may be subject to change in the light of experience, the FSA said. The effectiveness of the measure will also be considered as part of a wider review into the efficiency of capital raising by listed companies.
The FSA believes is the increased potential for market abuse through short selling had resulted in severe volatility in the shares of companies conducting rights issues.
“This is potentially damaging not only to the issuers in question but also to confidence in the overall fairness and quality of the UK market,” it said in a statement. “It can be particularly prejudicial to the interests of small investors. The problem is compounded by the length of time taken to complete rights issues.”
The watchdog added that it views short selling as a legitimate technique which assists liquidity and is not in itself abusive.
But it believes that the rights issue process provides greater scope for abuse, especially in today’s market conditions. “We consider that, in the first instance, improving transparency of significant short selling in such shares would be a good means of preventing the potential for abuse,” the statement continued. “In these circumstances non-disclosure of significant short positions gives the market a false and misleading impression of supply and demand in the securities concerned.”
The FSA may take further measures, such as restricting the lending of stock of securities in rights issues for the purposes of enabling short selling, or restricting short sellers from covering their positions by acquiring the rights to the newly-issued shares.