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Hedgeweek Comment: Back to normal?

Now that the US House of Representatives has passed, with whatever reservations, the Emergency Economic Stabilization Act, the legislation enacting the USD700bn bailout plan devised by Treasury Secretary Hank Paulson, does this mean that the restrictions hastily slapped on short-selling of financial stocks by regulators worldwide will be lifted?

Not so fast. In extending its ban on shorting financials last week, the Securities and Exchange explicitly tied the restrictions to the legislation, saying it was designed to 'minimise the possibility of abusive short selling as the Congress works to provide a comprehensive plan to stabilise credit markets and the financial system' and would be extended to allow time for completion of work on the legislation.

Having announced that the ban would lapse at 11:59 p.m. Eastern Time on the third business day after enactment of the legislation, the SEC has now confirmed that it will expire on October 8.

But several of the other measures the US regulator has imposed under emergency rules will live on; it has stated that the rule requiring institutional money managers to disclose short positions (albeit not publicly) will be made permanent, as will new penalties on broker-dealers and their short-seller clients who fail to deliver securities by the settlement date.

It remains to be seen what the environment will be like in practice for short selling in the US after Wednesday. In the meantime restrictions will remain in place in other countries, notably the UK, where they are due to be reviewed only in January. Any changes may not be for the better; British prime minister Gordon Brown has hinted that the ban could remain in place longer and be extended to stocks outside the financial sector.

Of course, it could be that the authorities in the US, UK and elsewhere are taking on board criticism that the short-selling ban has reduced market liquidity, hindered price discovery and hamstrung markets such as convertible bonds, and that they are ready to let short selling in their markets again operate freely. But you'd be ill advised to bet your fund on it.

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