19 Sep 2008

UK regulator to ban short-selling financial shares

10:37 pm on 19 September 2008

Britain's financial regulator has imposed a temporary ban on short-selling financial stocks, saying the measure was needed to prevent further instability in the financial sector.

Short selling, in which investors sell borrowed shares hoping to buy them back at a lower price and pocket the difference, has been blamed for sending banks' share prices plummeting and destabilising the global financial system.

US regulators tightened rules on short-selling on Thursday, while New York's attorney general has announced an investigation into the practice.

Chief executive of Britain's Financial Services Authority, Hector Sants, said in a statement that while the agency still regarded 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 Financial Services Authority said the new rule would remain in force until January 16, 2009. It added the ban would be reviewed after 30 days and could be extended to other sectors "if (the FSA) judges it to be necessary."

Britain's Chancellor of the Exchequer Alistair Darling welcomed the ban.

"I believe it is the right thing to do in the current market conditions and in the interests of financial stability," he said in a statement.

Some say short-selling attacks have played an unfair role in felling huge, venerable companies like Lehman Brothers Inc., which collapsed amid a sharply falling share price.

Some British politicians claimed that HBOS, whose share price plummeted on Thursday before it was snapped up by banking rival Lloyds TSB, also fell victim to speculators.

In New Zealand, NZX managing director Mark Weldon says there is minimal short selling.