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The Financial Services Authority will have to back pedal on enforcing the new rules on the shorting of shares until the system beds down, a top city lawyer warned today.
Richard Spedding of Travers Smith spoke out after it was revealed that almost 50 per cent of the disclosures by hedge funds to the FSA had mistakes in them.
Shorting is the practice of selling shares that you have borrowed from someone else in the knowledge that the price may have gone down by the time you make good on the deal – thus giving you a profit.
The practice has been blamed for forcing down the price of rights issues such as HBOS.
Mr Spedding said: “The regulator stipulated that failure to disclose would be market abuse - and then gave market participants very little time to organise internal systems and take advice. It’s no surprise there has been a scrabble.
“It's tempting to say the whole of the market suffers because of the confusion this creates. However the 'one-off' nature of the regime means that there is still scope for major uncertainty even if filings are correctly made.
“There was a groundswell of opinion calling for the regime to be pulled or suspended when announced - but it looks unlikely that it will be withdrawn now.
“The FSA will however have to pull back in practice from taking enforcement action where procedural issues are working through the system.
“The jury is still out on whether the quick fix has met its objectives. A longer term solution may instead be to examine procedural failings that have made rights issues such a perceived target for hedge funds.”
