The Financial Services Authority (FSA) and Securities Exchange
Commission (SEC) have taken strong action to curtail abusive short
selling in an effort to stabilise the financial markets. Below is a
summary of the current action taken by the FSA and SEC. Further
action from both regulators is expected.
On 17 September 2008, the SEC issued an emergency order adopting
a new temporary rule imposing restrictions designed to curb naked
short selling and the resulting delivery failures and a new
anti-fraud rule applicable to short sellers who fail to deliver
securities by the delivery date (Short Selling Emergency
The Short Selling Emergency Order, which applies to all
transactions in equity securities effected, cleared or settled by
or through any US registered broker-dealers or clearing agencies,
took effect on 18 September 2008 and expires, unless extended, on 1
October 2008. It does not apply to transactions effected on non-US
markets that are not cleared or settled through US registered
broker-dealers or clearing agencies.
SEC Chairman Christopher Cox indicated that the SEC would be
expanding its enforcement efforts to "obtain disclosure from
significant hedge funds and other institutional traders of their
past trading positions in specific securities. Those institutions
will also be required immediately to secure all or their
communication records in anticipation of subpoenas for these
On 18 September 2008, the FSA announced that it would be
introducing new prohibitions and disclosure obligations in relation
to short selling. As of 18 September 2008, the new provisions in
the Code of Market Conduct will serve to prohibit the active
creation or increase of net short positions in publicly quoted
In addition, from Tuesday 23 September the FSA will require
daily disclosure of all net short positions in excess of 0.25% of
the ordinary share capital of the relevant companies held at market
close on the previous working day (including such positions held at
close on Friday 19 September).
The FSA will continue to monitor the market to determine whether
it will be necessary to extend this approach to others sectors.
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
In the FSA statement, 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
In the years following the global financial crisis of 2008 many Australian investors lost their life savings as financial products failed and the Australian Stock Exchange shed over 3,000 points.
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