The new UK rules are introduced by the Short Selling (No. 2) Instrument 20084 amending the FSA’s Code of Market Conduct and constitute a complete ban on creating or adding to any net short positions in UK financial sector companies, although existing short positions need not be closed.

Furthermore, from 23 September 2008, short-sellers in the relevant companies will be required to make daily disclosures of “disclosable short positions,” i.e., any “net short positions” held by them representing 0.25% or more of the issued capital of a relevant company held at market close on the previous day. The first disclosure (which must be made by 3.30 p.m. on 23 September 2008) will apply to any such positions held on 19 September as well as those held on 22 September.

For this purpose, “net short position” includes any form of economic exposure, direct or indirect, to the company’s shares (but excluding shares held in a market-maker5 capacity). Therefore, the calculation must take account of short positions under options and other derivative instruments referencing the shares (such as contracts for difference, equity swaps and equity-linked notes) as well as in physical shares.

The short-seller must make the requisite disclosure on a Regulatory Information Service (RIS) on every business day by no later than 3.30 p.m., and must include the amount of the net short position, the date when it was held and the names of the short-seller and the issuer company.6 Disclosure is required, even if the short position has not changed from the previous day’s reported position.

Failure to make such disclosure will amount to “market abuse” (as a “misleading behaviour”) under the Financial Services and Markets Act 2000.

At first glance, the ongoing disclosure obligation appears odd, due to the outright ban on creating new short positions in the relevant companies after midnight on 18 September 2008. However, the reason for this is that a person may have had a disclosable short position before 19 September 2008 or alternatively may have had a nondisclosable short position before that date which, due to extraneous factors, becomes a disclosable short position.

The new rules will initially remain in force until 16 January 2009, although the FSA will review them after 30 days and publish a comprehensive review of the rules on short-selling in January 2009.

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