Short selling is not per se a significant contributor to market instability, according to a survey of senior managers at hedge fund firms in London commissioned by IMS Consulting.<
Short selling is not per se a significant contributor to market instability, according to a survey of senior managers at hedge fund firms in London commissioned by IMS Consulting.
Industry members acknowledge the Financial Services Authority’s interest and role in short-selling practices, with two-thirds of survey respondents recognising the FSA’s legitimate role in improving policy and rule-making in this area.
However, there is a consensus as to the way forward when the current short selling prohibitions run out.
While those surveyed believed that the UK should not generally have across-the-board prohibitions against short selling, nearly 40 per cent of respondents recognised there may be limited and extraordinary circumstances in which temporary restrictions may be imposed.
Nearly 50 per cent stated that the FSA’s policy should only be to apply temporary prohibitions during such times.
The survey also highlighted strong feelings within the industry since the introduction of short-selling restrictions.
Some respondents were of the opinion that the FSA had acted in a ‘knee-jerk’ fashion with no industry consultation; that the FSA needs to recognise that short selling is integral to ensure orderly markets; that the short selling ban had increased market volatility; and that it had significantly destabilised markets.
When asked how the FSA should regulate short selling if the political pressure to do so was overwhelming, 95 per cent of all respondents said the regime should only consider restrictions relating to naked short selling or the period of a rights issue.
There was virtually no support for any short selling regime that singled out financial sector shares, while 70 per cent of respondents felt that it should be the responsibility of the FSA to monitor levels of naked short selling.
A further 55 per cent of respondents felt that the FSA should keep disclosure of the level of short selling private with 35 per cent suggesting that the level of short selling should be disclosed to the market by the FSA on an aggregate basis.
Chris Rexworthy, director of risk consulting at IMS, says: ‘The results of the survey, which are the responses of close to a quarter of hedge fund managers in the UK, demonstrate that the industry continues to be understanding and supportive of the need for effective regulation in the UK, in so far that this is proportionate and consistent.
‘Hedge fund managers, like other investment managers, primarily invest in long positions, so they have an interest in all markets having effective price formation. Short selling plays an important role in enabling this. Many from the industry are sending a clear message to the FSA ahead of its upcoming consultation proposing new rules.
‘A significant proportion of the industry has indicated that effective regulation and rules will be best achieved by careful analysis of the issue and maintaining open dialogue with them.’
