FSA Requires Enhanced Disclosure of Short Positions

In a significant move, particularly for hedge funds, the UK Financial Services Authority adopted rules requiring the disclosure of significant short positions in stocks admitted to trading on markets which are undertaking rights issues. For this purpose, the authority defined 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. The obligation will be to disclose positions exceeding this threshold to the market by means of a Regulatory Information Service by 3.30pm the following business day. The new rules took effect on June 20, 2008.

The FSA still views short selling as a legitimate technique which assists liquidity and is not in itself abusive. But it is also the case that the rights issue process provides greater scope for what might amount to market abuse, particularly in current conditions. The FSA believes that improving transparency of significant short selling in such shares would be a good means of preventing the potential for abuse. 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.

A disclosable short position is one representing an economic interest of one quarter of one per cent of the issued capital of a company. Holders calculating whether they have a disclosable short position must take into account any form of economic interest they have in the shares of the issuer, excluding any interest held as a market maker. Failure to give adequate disclosure of a disclosable short position will constitute market abuse.

The FSA promised that these provisions and, in particular, 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. Further, the overall effectiveness of the measure will be considered as part of the wider review.

In addition to the new disclosure regime, the FSA is also considering whether it might be necessary to take further measures in this area. A number of options are being looked at, including restricting the lending of stock of securities in rights issues for the purposes of enabling short selling.