An FSA response to dastardly short-sellers, or bank robbers as they’re known in some quarters, has arrived. The trouble is that the HBOS/bank robber incident happened before the bank, and some of its peers, launched their rights issues. That in fact was the point – the banks were, at the time, denying they had a capital short fall.
But the FSA’s Friday edict specifically concerns banks companies undertaking rights issues. Says the FSA:
In current market conditions, there is increased potential for market abuse through short selling during rights issues. As a result, there has been severe volatility in the shares of companies conducting rights issues.
Point of order, please. Volatility involves going up and down. If it’s just going down, it’s a trend. Bradford & Bingley, for example, was sold off because investors didn’t believe the underlying business was as robust as management were making out. And they were right.
Moving along.
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. The problem is compounded by the length of time taken to complete rights issues.
Quite right. A system designed with hauling post bags around on foot in mind is probably due for a rethink. So we have a “review” of how capital raising can be improved. But also there are some immediate measures on how to maintain market confidence and prevent abuse during rights issues.
The good news:
The FSA views short selling as a legitimate technique which assists liquidity and is not in itself abusive.
And the rest:
But it is also the case that the rights issue process provides greater scope for what might amount to market abuse, particularly in current conditions. We consider that, in the first instance, improving transparency of significant short selling in such shares would be a good means of preventing the potential for abuse. In these circumstances non-disclosure of significant short positions gives the market a false and misleading impression of supply and demand in the securities concerned.
So from next Friday, those shorting companies undertaking rights issues will have to disclose that fact, if they are short 0.25 per cent of the issues shares or more. The obligation will be to disclose the position by 3.30pm the following business day – and the threshold for disclosure will be kept under review.
Fascinating stuff. Except we’re somewhat at a loss to see how this change will prevent “market abuse” as such. What it does to is extend the definition of market abuse, to cover failure to come clean on a disclosable short position.
Or (in the amendments to the Market Conduct rules) :
the disclosable short position is reached or exceeded during a rights issue period; is behaviour that, in the opinion of the FSA, is market abuse (misleading behaviour).
That amounts to putting down a marker – broadly, that if the FSA deems that shorting is being done with the specific aim of driving an issue below the rights price, then it’s not on.
There are other measures under consideration, which could be introduced at any time, including restricting the lending of stock in rights issues, and specifically restricting the covering of short positions through acquiring newly issued shares.
In the meantime, the FSA has just increased the marginal cost of shorting rights issues by creating a whole load of paperwork.
Respite at least for HBOS. The bank’s shares soared 7 per cent on the news, to 301p, back safely above its 275p rights price. Euphoria too over at Johnston Press, up almost 21 per cent.
Related links
FSA statement on disclosure regime for significant short positions
Speed up rights issues, say bankers – FT.com