FSA imposes new short-selling rules

Britain's financial watchdog imposed new rules today to smooth the process for firms raising cash from rights issues, rejecting…

Britain's financial watchdog imposed new rules today to smooth the process for firms raising cash from rights issues, rejecting hedge-fund criticism the move was rushed in.

Investors now need to reveal any short positions over 0.25 per cent in companies going through rights issues, under surprise guidelines unveiled by the Financial Services Authority (FSA) a week ago.

The rules came into effect at midnight, despite the hedge fund industry lobby group requesting an extension.

The move is aimed at restoring confidence in cash calls ahead of rights issue by UK banks HBOS and Bradford & Bingley, after the fundraisings risked failure following steep falls in their shares.

The rights issue process provides greater scope for market abuse, the FSA said.

Short-sellers, often hedge funds, sell borrowed shares in the market in the hope of buying them back more cheaply at a later date. During a rights period, trading can be more volatile and losses accelerate if shares fall below the issue price.

The FSA's move has drawn strong criticism, however.

The Alternative Investment Management Association (AIMA), representing hedge funds, said it "set an awkward precedent".

AIMA said it was surprised there was no prior consultation, and the short time frame to its implementation allowed no time to prepare.

Investors who have taken a short position have until 1530 the following business day to disclose it. They only need to disclose the initial short position.

Shares in HBOS, Bradford & Bingley and newspaper publisher Johnston Press rallied after the FSA move on hopes it will underpin a more stable trading environment, although in recent days the banks have come under pressure again.

HBOS, Britain's biggest mortgage lender, issued its prospectus for a £4 billion rights issue yesterday.

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