Gordon Brown warns short-selling ban may become permanent

Date: Thursday, September 25, 2008
Author: Katherine Griffiths, Telegraph.co.uk

There will be a more stringent regime governing short selling under a permanent change to the rules from January, the Prime Minister has said.

Speaking at the Labour Party conference, Gordon Brown signalled that at least some elements of the crack-down on short-selling imposed by the Financial Services Authority last week would continue.

Meanwhile, the FSA said it might name and shame and even fine – hedge funds which do not disclose short positions in banks. The move came after Eton Park, a hedge fund set up by former Goldman Sachs bankers, yesterday announced to the stock exchange its short position in HSBC was 0.28pc. The hedge fund also disclosed the position on Tuesday.

The FSA attempted to stop the battering of banks' shares on Thursday by banning new short selling in financial stocks and forcing investors to disclose existing positions by Tuesday.

Mr Brown defended the ban, saying "when a group of people are exploiting a difficult economic situation, it is right to stop it."

The FSA said the ban would be in place until January when permanent new rules on shorting would be formulated. Mr Brown said: "I think you'll find new rules come in for the future...We have very unusual and volatile financial markets . It would be wrong for good companies to be brought down by speculators."

Darren Fox, a lawyer at Simmons & Simmons who represents some of London's biggest hedge funds, said his clients were "really quite shell shocked and juggling about 15 balls in the air".

However, the FSA has still made limited amendments to last week's ban. Yesterday the regulator said the restrictions would be measured on a fund by fund basis, not at a manager level. This means that even if a fund manager has an overall long position due to balancing between long and short positions, he or she still has to disclose the holding in each fund.

Clive Cunningham, a partner at law firm Taylor Wessing, said the FSA would probably have to put any future rules on shorting on firmer footing than they are on currently. "Last week's action was taken under the Code of Market Conduct, which are guidelines not a legal rule," Mr Cunningham said.

Man Group, the London-listed hedge fund, has lobbied the FSA to be added to the list of protected shares which cannot be shorted. Despite being a hedge fund, Man has argued its shares have been hit as investors have been forced to stop selling mainstream banks and insurers.