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FSA Chair: No Short-Sale Ban, No Uptick Rule for U

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MANCHESTER, England (–Howard Davies, chairman of the Financial Services Authority, defended the practice of short selling but indicated that the FSA would like to see greater disclosure of short positions.

In September, the FSA will convene a roundtable of market practitioners and trade associations, designed to include hedge funds, prime brokers and critics of short selling. After hearing their views on the subject, it plans to make specific reform proposals in early October. Mr. Davies’ speech July 25 was an indication of which way this deliberative wind is blowing.

He said that some of the critics of short selling would like to see it banned from the United Kingdom’s markets altogether. Others would prefer that less draconian obstructions be created, such as the uptick rule, in place in the United States. On the other hand, he said, defenders of the practice see it as “a necessary and desirable underpinning to the liquidity of the London market” and observe that no major market anywhere has enacted a general ban.

Mr. Davies told his audience, the Commonwealth Games Business Breakfast at Bridgewater Hall in Manchester, that, in his own view, not only would a general ban be unwise but that even measures that just throw “grit” (as he puts it) into short sale machinery would be uncalled for by any evidence. He cited data about the volume of stock lending in the U.K. market, which, he said, is a good proxy for the level of short selling. Recently, in a period of sharp stock market price drops, there has been no significant increase in the levels of stock lending. There is, then, no reason to believe that short sellers have exaggerated the decline in the FTSE indexes.

Furthermore, over the last three months the Standard & Poor’s 500 stock index in the United States and comparable indexes reflecting stock prices changes in Germany and France have each shown declines as large or larger than that of the FTSE 100, despite the fact that each of those three countries throw “grit” into the wheels of short selling that the U.K. does not.

“We can see no obvious argument,” he concluded, “that introducing an uptick rule would necessarily reduce volatility or raise prices.”

Nonetheless, “we are sympathetic to arguments for greater disclosure. Markets rarely suffer from regulation that improves the flow of information.”

Reactions to Davies’ Speech

The day after Mr. Davies’ address, the Alternative Investment Management Association, London, declared that it welcomed his empirical approach to these matters. It promised to play an active role in the process of consultation that the FSA plans and to collect data from its members “to determine what role, if any, short selling/stock borrowing, carried out by hedge funds, has played in the turmoil of the recent downturn in the markets.”

The statement, signed by the AIMA’s chairman, Hans-Willem van Tuyll, and deputy chairman, Dermot Butler, also described the down market as a “correction, long anticipated by most market professionals.”

Elaborating on this statement, AIMA director Emma Mugridge said Aug. 1 “AIMA’s constantly got an open door to the FSA. Both we and our membership will be a part of the consultative process.”

Asked whether there was a timetable for the collection of hard data, she replied: “It’s not easy to come by, that sort of information. Stock lending numbers are easy to come by, but not the shorting numbers. So it’s a major task, we’re going at our best speed at the moment.”


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