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Finance: Short Selling

Volume 706: debated on Tuesday 13 January 2009

Question

Asked By

To ask Her Majesty’s Government what steps they are taking to ensure that the lifting of the ban on the short selling of shares in financial companies does not adversely affect the market.

My Lords, the partial short selling ban was a temporary measure. The FSA continues to monitor the position and is proposing to extend the requirement to disclose to the market until 30 June 2009 significant short positions in the shares of UK financial institutions. Such disclosure will continue to reduce the potential for market abuse and disorderly markets. The UK authorities continue to work together to take all necessary steps to ensure the stability of the UK financial system.

My Lords, I thank the Minister for his Answer. Is he absolutely certain that those dangers of market abuse, disorderly markets and deficiency in transparency have all nearly gone? If they have not, is that not a good reason why the temporary ban should stay? Furthermore, does he agree with Martin Gilbert, who says that the quickest way of making money is by short selling any bank on rumour? Has that rumour element gone? If it has, how come Belgium, France, Switzerland and Germany have extended their short selling ban? Furthermore, all taxpayers in Britain have shares in the banks that were recapitalised. Could not someone bet on the taxpayers losing more money by short selling our own interests?

My Lords, the most reverend Primate has waxed lyrical on this subject. I read with great interest his speech at the Drapers’ Hall in September to the Worshipful Company of International Bankers. I recommend it to all Members of the House who seek amusing anecdotes to tell at after-dinner speeches. It was a truly first-class speech.

The FSA has formed a view that the potential for market abuse and disorderly markets, which clearly exercised it when it introduced the ban in September, has now eased. It has issued a statement of consultation and we will respond at the end of this week. The FSA has set out the ground rules for controlling short selling in the future, with an important emphasis upon transparency and a move to symmetry with the disclosure of long positions, which I find commendable. The FSA will also issue within the next month a more reflective consultation document on the whole issue of short selling. A number of jurisdictions in the world, including, in particular, the United States of America, have removed restrictions on short selling. Others have maintained them, either on a permanent or a temporary basis—as the FSA is continuing to do.

My Lords, I may be naive on these matters, but does my noble friend accept that short selling is intended to adversely affect the markets? Is it not a little obscure what the benefits really are? Does he accept that it would be helpful if he published a document, perhaps in the Library, listing the benefits—with or without these measures—so that we can all peruse it at our leisure?

My Lords, I always proceed with caution when my noble friend says that he is naive on a matter. Let us be clear: short selling is a feature of most financial markets—commodity markets, currency markets and deposit markets—and its benefits are the enhancement of price discovery and the creation of liquidity to cope with transaction volumes. Those are the theoretical advantages of short selling and they are very common features of commerce. Indeed, if you buy goods on the internet, frequently you will buy from someone who does not possess the television set or the book that they are committing to sell you but they will cover their short position from the supplier. Therefore, I think that we need to demystify this subject a little. Finally, on the question of whether short selling is designed to be damaging to markets, it could be argued that it would be damaging to the value of a particular security but not necessarily to the value of an effective market.

My Lords, we agree with the Minister on the analysis of the benefits of being able to short sell in markets. However, when, in October, the SEC removed its ban on the short selling of financial institution stocks, it said that it believed that the costs of doing so had outweighed the benefits. Does the Minister believe that that will also be the case in the analysis of the situation in the UK?

My Lords, I believe that the FSA’s consultation, which will be launched within the next month, will cover that. A great deal of academic research, particularly from the University of Technology in Sydney and the Cass Business School in this country, will inform that review.

My Lords, is the Minister aware that on the day that the bar was lifted, a leading hedge fund manager said:

“Hallelujah. This should allow people to return to some sort of normality”?

Does he agree that it is that kind of normality that brought the banking sector to its knees and that, frankly, the country has had enough of it?

My Lords, I will not be drawn into commenting on a quotation from a particular hedge fund manager. The hedge fund community is wide and diverse, and the sector’s taxonomy is complex. Suffice to say that with regard to the difficulties in the banking sector, I do not think that we can point the finger at short selling. More fundamental and deeper problems lie at the source of the difficulties that our banks and banks throughout the world are currently experiencing.

My Lords, I am not aware of whether the Church of England has engaged in short selling; I am aware that Church of England commissioners, having taken advice on the ethical issues, engage in the lending of stock, which is frequently designed to support the completion and settlement of short-trading transactions. It is important to note that just about every major pension fund and every major endowment in this country is in some way or another involved in short selling. However, my noble friend made a fundamental point about stock lending practices. I have asked the FSA to look at whether those practices are sufficiently understood by practitioners and subject to appropriate regulation.