The UK’s Financial Services Authority is instituting a ban on shorting financial stocks.

The FSA’s board agreed to introduce new provisions to prohibit the creation of new short positions, or the increase of existing positions in publicly quoted financial companies from midnight tonight until January 16, 2009. It will also require from daily disclosure of all net short positions in excess of 0.25% held at market close on the previous working day. The FSA says that it may extend this approach to other sectors if it judges it to be necessary.

Hector Sants, chief executive of the FSA, said, “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.”

In a speech, Callum McCarthy, chairman of the FSA, explained the move further, saying, “We have been much concerned – as have many – at the volatility and what I would describe as incoherence in the trading of equities, particularly for financial institutions. There is a danger in a trading system which allows financial institutions to be targeted and subject to extreme short selling pressures, because movements in equity prices can be translated into uncertainty in the minds of those who place deposits with those institutions with consequent financial stability issues. We have seen acute examples of this phenomenon in both London and New York this week.”

“We intend this prohibition to run in the first instance for some 120 days, during which time we will review both its effectiveness and the general policy we wish to adopt in respect of short selling more generally,” he added. “This is a measure which reflects the present turbulence in markets. It is designed to have a calming effect – something which the equity markets for financial firms badly need. I hope that practitioners will support both the ambition and the chosen means of achieving it.”

IE