The U.K.s new rule on disclosing short positions has perplexed investors.
Some argue the rule requiring investors who are short by more than 0.25% of a stocks total market capitalization when the entity is doing a rights issue to disclose their position is poorly thought out. Investors in the U.K. are pushing for the Financial Services Authority to review the rule and consult with investors over the potential impact of any proposed new rules over short selling.
This is the first time in the U.K. investors have had to disclose short positions. In its announcement, the FSA said the new rule combats the potential for market abuse in rights issues when there is a falling market. That was a reference to the dramatic 17% drop in the share price of Edinburgh-based HBOS PLC, the U.K.s biggest mortgage lender, in a single day on March 19 when rumors emerged among investors that the company was suffering a funding crisis.
Short selling has been on the agenda for regulators around the world. With the virtual collapse of investment bank Bear Stearns Cos. Inc. in a situation similar to HBOS, the U.S. Securities and Exchange Commission issued a temporary rule in July that effectively banned naked shorting in 19 U.S. bank stocks. (The ban expired Aug. 12.)
In Australia, the federal government was expected to announce changes to Australias Corporations Act that relate to short selling and stock borrowing when Parliament resumed in late August. The Australian government is likely to implement a recommendation by the Reserve Bank of Australia to change the Australian Stock Exchanges computer system that manages the settlement process to require stock lenders and borrowers to populate a field in the system to indicate whether a trade is related to a securities loan and whether the loan is a new loan, a loan return or a loan recall.
ASX officials conducted a lengthy consultation process with investors about whether and how shorting rules might need to change. But market participants in the U.K. were not consulted before the new shorting rule was introduced.