UK: implementing aspects of the Financial Services Act 2010

The Financial Services Authority has published a consultation paper in which it reports, in respect of the earlier consultation paper CP10/11, on the feedback received and sets out its policy response: see here (pdf). The consultation paper contains new rules dealing with, amongst other things, short selling disclosure and the FSA's powers of enforcement.

Europe: consultations on derivatives and short selling

The European Commission has published two consultation papers on draft legislation as part of its work on reforming financial regulation. The first concerns derivatives and market infrastructures: see here (pdf). The second concerns short selling and credit default swaps: see here (pdf). FAQs in respect of these consultations are available here and here.

Europe: Commission Communication on financial services regulation

The European Commission has published a Communication titled Regulating Financial Services for Sustainable Growth: see here (pdf). The Communication describes the actions already taken by the Commission as well as forthcoming proposals. The Commission intends that the vast majority of its new proposals will be presented to the Council and European Parliament by the end of 2010.

These proposals will cover derivatives, credit default swaps, short-selling, improvements in the Markets in Financial Instruments Directive, revisions to the Deposit Guarantee Schemes Directive and the Investor Compensation Schemes Directive, revisions to expand the scope of the Market Abuse Directive to include derivatives, amendments to the Capital Requirements Directive (CRD IV), a Communication on sanctions in the financial services sector to promote convergence, and further work on international accounting standard convergence.

Europe: short selling measures - CESR updates summary of regulators' actions

Following the restrictions imposed on naked short selling by BaFin in Germany (see here), the Committee of European Securities Regulators has updated its very useful summary of the measures taken by its members with regard to short selling: see here (pdf).

Europe: the alternative investment fund managers directive

At a meeting of the Economic and Financial Affairs Council yesterday a mandate was agreed for negotiations with the European Parliament on the alternative investment fund managers directive. The purpose of the directive is twofold:

• to introduce a harmonised framework for monitoring and supervising the risks that alternative investment funds (e.g., hedge funds) pose to their investors, counterparties, other market participants and to financial stability
• allowing alternative investment fund managers to provide services and market EU funds throughout the EU single market, subject to compliance with strict requirements.

Further information about the agreed mandate is available here (pdf). The press conference can be watched here. On Monday, MEPs on the Economic and Monetary Affairs Committee agreed their position with regard to the proposed directive: see here. Interestingly, the MEPs agreed that naked short selling should be prohibited. Short selling is one of the matters currently being considered by the European Commission as part of its work on financial regulation.

UK: the FSA flexes its muscles - part 1 - rights issues and short selling

The UK's Financial Services Authority believes that in the current market conditions there is increased potential for market abuse through the short-selling of shares during rights issues. Such is the FSA's concern that new disclosure rules will come into force this Friday. These require the disclosure of short positions (0.25% or more) in shares admitted to trading on prescribed markets where a rights issue is taking place. FAQs concerning these rules have been published here. The rules have caused much disquiet, as reported here, not least because they were introduced without consultation.

Europe: financial regulation reform

The European Commission has published a table setting out the progress made in implementating the G20 commitments on financial regulation reform: see here (pdf). The table reports that the Commission's forthcoming financial institution corporate governance green paper will not, as expected, be published this month but will instead be published in June.

Further background information, with explanations for some of the abbreviations in the table, is available in the accompanying presentation: see here (pdf).

UK: the Financial Services Act 2010 - FSA implementation

The Financial Services Authority has published a consultation paper in which it sets out proposals concerning some of it new powers and duties under the Financial Services Act (2010): see here (pdf). The consultation paper focuses on short-selling rules, enforcement powers and the new financial stability information-gathering power.

With regard to short-selling, the FSA notes in the paper (para. 2.8):

We consider that the present scope of the disclosure obligations affecting net short positions held in UK financial sector companies remains appropriate. At this stage we do not want to extend the scope of the disclosure obligations before finalising a comprehensive regime at international level. Accordingly, we propose that holders of significant net short positions in UK banks, UK insurers and the UK-incorporated parent undertakings of UK banks and UK insurers, as defined in the Glossary to the FSA Handbook, should be required to disclose those positions".

UK: FSA report to HM Treasury on the implementation of the recommendations of the Rights Issue Review Group

The Financial Services Authority has published its report to HM Treasury on the implementation of the recommendations of the Rights Issue Review Group: see here (pdf). The report notes:

The RIRG report’s two key recommendations were to shorten the minimum rights issue subscription period from three to roughly two weeks and to increase the allotment ceiling from one-third to two-thirds. The implementation of these recommendations has created a significantly better environment for rights issues from that when the RIRG report was published.

The RIRG report made a number of other recommendations relating to the duration of rights issues and to underwriting and short selling. These are also addressed in this paper as are the three RIRG recommendations concerning conditional rights issues, compensatory open offers and accelerated pre-emptive issues. The latter three topics have been the subject of a series of meetings with market participants in 2009. We originally thought they would have been the basis of a consultative paper, either a discussion paper or a consultation paper, depending on our findings. However, we have now concluded that a consultative paper is not needed ..."

UK: the Financial Services Act 2010

A copy of the Financial Services Act 2010 is available here (html) and here (pdf). The Financial Services Authority has provided a very short overview of the changes brought about by the Act with regard to its objectives, powers and duties: see here. Some of the provisions came into force yesterday. See Section 26 of the Act for further information about commencement dates.

Europe: CESR calls for pan-European short selling disclosure regime

The Committee of European Securities Regulators published a report yesterday in which it recommended the introduction of a pan-European short selling disclosure regime: see here (pdf).

Europe: short selling - measures adopted by CESR members

The Committee of European Securities Regulators has updated its very useful summary of the measures taken by its members with regard to short selling.

UK: short selling - FSA wants disclosure in respect of all equities

The Financial Services Authority published a feedback statement yesterday in which it set out its policy stance on short selling. The FSA explained that it wishes to see the disclosure of significant short positions in all equities. There are, however, no immediate plans to introduce such a regime because the FSA's preferred course is to work towards agreeing such a framework at an international level. 

The FSA continues to believe that short selling is desirable; to quote from the feedback statement: 

We continue to hold the view that short selling plays an important and positive role in normal market conditions and we are convinced that a blanket ban, other than in emergency circumstances, would have an undesirable negative impact on market efficiency .... We do not consider naked short selling to be illegitimate activity in itself: it can provide valuable liquidity to the markets and is necessary as part of market making activity ... we would be concerned about any naked short selling carried out with no intent or reasonable plan for delivery of the shares on the intended settlement date, and would be prepared to pursue action against such conduct". 

Note: for a summary of the actions taken by regulators and/or Governments across Europe in respect of short selling, see the summary produced by the Committee of European Securities Regulators.

UK: FSA bans short-selling of the shares of quoted financial institutions

In an attempt to promote more orderly markets, the UK's Financial Services Authority has introduced, with effect from midnight tonight, a ban on the short-selling of shares in quoted financial institutions. In addition, and with effect from 23 September, daily disclosure will be required of all net short positions in excess of 0.25% of the ordinary share capital of such companies on the previous working day. These rules are being introduced in the FSA's Code of Market Conduct and will remain in force until 16 January 2009 (although they will be reviewed in 30 days' time).  A comprehensive review on short selling will be published in January 2009. 

According to the FSA's chief executive, Hector Sants:

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".

Note: in the USA, the SEC has introduced further rules governing naked short-selling - click here for the SEC press release. These rules introduce a permanent ban on the abusive naked short selling of all listed stocks, described by the SEC as:

In an ordinary short sale, the short seller borrows a stock and sells it, with the understanding that the loan must be repaid by buying the stock in the market (hopefully at a lower price). But in an abusive naked short transaction, the seller doesn't actually borrow the stock, and fails to deliver it to the buyer. For this reason, naked shorting can allow manipulators to force prices down far lower than would be possible in legitimate short-selling conditions".

Update (19 September 2008): the FSA has published the list of institutions to which the rules apply - see here.  The amendments to the Code of Market Conduct have been published here.

Update 2 (19 September 2008): the Australian Securities Exchange has announced that naked short selling will be prohibited from the opening of trading on 22 September. 

Update 3 (26 September 2008): the FSA has published FAQs here.