The UK’s Financial Services Authority is tackling the increased risk of market abuse through short selling when firms are raising capital through rights issues with a new disclosure regime.

The FSA says that, in current market conditions, there is increased potential for market abuse through short selling during rights issues. As a result, there has been severe volatility in the shares of companies conducting rights issues, it observes. “This is potentially damaging not only to the issuers in question but also to confidence in the overall fairness and quality of the UK market. It can be particularly prejudicial to the interests of small investors,” it says.

The FSA stresses that it 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,” it says.

It also believes that improving transparency of significant short selling in such shares will be a good way 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,” it adds.

Therefore, it’s introducing provisions to come into effect on June 20, which will require the disclosure of significant short positions in stocks admitted to trading on prescribed markets which are undertaking rights issues. For this purpose, it defines 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.

In addition to the new disclosure regime, the FSA says it is also giving consideration to whether it might be necessary to take further measures in this area. A review will be conducted into how capital raising by listed companies can be made more orderly and efficient. “We are currently examining a number of options including the following: restricting the lending of stock of securities in rights issues for the purposes of enabling short selling; and restricting short sellers from covering their positions by acquiring the rights to the newly issued shares,” it says.