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FSA launches disclosure rules for short selling in company rights issues

The FSA has launched new disclosure requirements to prevent market abuse through short selling positions in companies conducting rights issues.

The regulator says that current market conditions mean there is heightened potential for abuse and so, from next Friday, it will require disclosure of significant short selling in companies when rights issues are underway.

It says short selling causes severe volatility in the shares of these companies, which damages the issuers and also confidence in the UK market.

The effect can be particularly severe for the interests of small investors and the problem is made worse by the length of time taken to complete rights issues, says the FSA.

The regulator is conducting a review into how capital raising by listed companies can be made more orderly and efficient, but it has also taken immediate measures to maintain market confidence and prevent potential abuse during rights issues.

While the watchdog sees short selling as a legitimate technique which assists liquidity and is not in itself abusive, it says rights issues provide greater scope for market abuse and that transparency of significant short selling should be improved.

The FSA says non-disclosure of significant short positions gives the market a false and misleading impression of supply and demand in the securities concerned.

New provisions in the FSA’s Code of Market Conduct, to come into effect from Friday 20 June will require significant short positions in stocks undertaking rights issues to be disclosed.

The FSA is defining a “significant” short position as 0.25 per cent of the issued shares achieved via short selling or by any instruments giving rise to an equivalent economic interest.

Positions exceeding this threshold must be disclosed through the Regulatory Information Service by 3.30pm the following business day.

The provisions were made by the FSA board yesterday and the thresholds will be kept under review.

The FSA is also considering whether it needs to take further measures like restricing the lending of stock of securities in rights issues for the purposes of enabling short selling.

It is also considering restricting short sellers from covering their positions by acquiring the rights to the newly issued shares.

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