UK FSA Bans Hedge Fund Short Selling After Attack on HBOS

By: Nadeem_Walayat

The FSA in a statement issued a short while ago effectively bans hedge fund short-selling as of midnight tonight of financial stocks. This follows just 24 hours from my analysis ( Hedge Funds Crash Halifax, HBOS Rescued by Lloyds TSB) that in the wake of the HBOS collapse recommended UK government take immediate action to regulate short selling of financial institutions so as to allow the distressed banks time to negotiate with possible merger partners than to be forced into shot-gun weddings or worse as a consequence of relentless hedge fund short-selling that results in market panic actions that acts as a force of great instability for the whole of Britain's financial system.

Earlier analysis at the start of the week ( Hedge Funds Target Halifax, HBOS as Shares Crash 30%) was probably one of the first to break the news of the ongoing assault of hedge funds against HBOS that were targeting a Northern Rock-esq collapse with a view to maximizing short-term profits.

In my view, whilst it is good that the FSA has now taken the decision to regulate short-selling, however this decision should have been taken 6 months ago when HBOS was first attacked by short selling hedge funds that were accompanied by unsubstantiated rumours of the banks financial position - 19 Mar 2008 - Halifax (HBOS) Hit by Hedge Fund Short Selling and Emergency Funding Rumours. At the time the FSA had issued a statement that they would be looking into short-selling but FAILED in their duty to implement such action until they were effectively forced to do so in the wake of the seismic HBOS financial earthquake.

This sends a clear message to the hedge fund speculators that the government is not in any mood to be messed around, and that urgent and immediate action will be taken regardless of the fact that this means the temporary suspension of the free market towards an era of state control of markets during a period of credit crisis emergency to prevent a total collapse in the banking system.

The market response is expected to be positive and to result in a huge rally in the UK stock market on tomorrows open, probably more than a 200 point gain as short hedge funds scramble to cover their short positions and hence end up losing money !

The full FSA statement reads:

FSA/PN/102/2008
18 September 2008

The Board of the Financial Services Authority (FSA) today (Thursday 18 September) agreed to introduce new provisions to the Code of Market Conduct to prohibit the active creation or increase of net short positions in publicly quoted financial companies from midnight tonight.

In addition, the FSA will require from Tuesday 23 September daily disclosure of all net short positions in excess of 0.25 per cent of the ordinary share capital of the relevant companies held at market close on the previous working day. Disclosure of such positions held at close on Friday 19 September will also be required on Tuesday 23 September.

The FSA stands ready to extend this approach to other sectors if it judges it to be necessary.

These provisions will remain in force until 16 January 2009, although they will be reviewed after 30 days. A comprehensive review of the rules on short selling will be published in January.

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."

The detailed changes to the Code of Market Conduct, and a schedule of the companies whose securities are covered by them, will be published before the market opens tomorrow (Friday 19 September).

Your analyst watching for and anticipating the next credit crisis event.

By Nadeem Walayat
http://www.marketoracle.co.uk

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