8.45am BSTFSA tightens short-selling rulesGraeme Wearden...

8.45am BSTFSA tightens short-selling rulesGraeme Wearden guardian.co.uk, Friday June 13 2008 Article historyHedge funds who try to make a killing by short-selling the shares of a company conducting a rights issue will have to reveal their activities, under new rules announced today.

The Financial Services Authority said that the practice of taking a short position in a company while it is holding a cash call to shareholders was potentially an abuse of the market. From next week, short-sellers will have to disclose the position to the wider market.

"In current market conditions, there is increased potential for market abuse through short selling during rights issues," said the FSA.

"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 added,

The FSA has previously insisted that short-selling is a valuable part of the financial marketplace as it boosts liquidity. Today it reiterated that the wider practice of shorting is not itself abusive, but that it poses a particular problem when cash-strapped firms are seeking new capital.

The announcement comes just two days after shares in HBOS, the UK's biggest lender, plunged below 275p – the price at which it hopes to raise £4bn by selling new shares to existing investors.

HBOS shares rallied sharply this morning after the FSA made its announcement, up 5% to 295p. Shares in Johnston Press, which is also holding a cash call at 53p a share, jumped 18% to 68.5p.

Short-selling means selling shares which you do not actually own, but instead borrow from another party to sell on the market. It is profitable if the share price has fallen by the time the shares are returned to the lender. Large volumes of short selling can drive a company's share price down significantly.

Short-selling by hedge funds had been blamed for causing the rapid drop in HBOS's share price in recent weeks. They have calculated that they will be able to buy the new shares issued under the rights issue cheaply from small investors.

From June 20, the FSA's code of market conduct will be amended so that any trader that has a short-selling position worth at least 0.25% of the issued shares of a company holding a rights issue will have to disclose it.

The regulator also hinted that it may go further in the future.

"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," said the FSA