The Financials Services Authority (FSA) has introduced new provisions into its Code of Market Conduct which require the disclosure of significant short positions in stocks admitted to trading on prescribed markets which are undertaking rights issues. The provision, which came into force on June 20, was widely seen as a response to “bear raids” and potential market abuse surrounding the rights issues of HBOS and Bradford & Bingley.
The FSA is also considering whether or not to restrict the lending of stocks of companies involved in rights issues – a key source of revenue for pension funds and other institutional investors.
Investors with a net short position at or exceeding 0.25 per cent in a company undertaking a rights issue, regardless of when that position was first implemented, will have to disclose that position by means of a Regulatory Information Services (RIS) announcement, using the TR3 form available on the FSA website. This includes positions attained via cash equities or derivatives (even options that cannot be exercised during the rights-issue period), but excludes convertibles that do not give an economic interest in the already issued share capital of the company.
There is no requirement to disclose when the position falls below the 0.25 per cent threshold, nor when an already-disclose position is increased – although the FSA “will keep this approach under review”.
“The FSA views short selling as a legitimate technique which assists liquidity and is not in itself abusive,” said the regulator. “But it is also the case that the rights issue process provides greater scope for what might amount to market abuse, particularly in current conditions.”
But the Alternative Investment Management Association criticised the apparent short-termism of the move.
“The FSA has an obligation to follow a consultation process with industry when new measures of this nature are set to be introduced,” said deputy CEO Andrew Baker. “This measure appears to be in response to the need to recapitalise the banking system. This seems to be a rushed measure to assist a single sector and undoubtedly sets an awkward precedent for the future.”
Aoifinn Devitt, of alternative investment advisory firm Clontarf Capital, noted the generally cool reception to the FSA’s move, in contrast to previous bouts of schadenfreude that have greeted occasions when hedge funds have been targeted by regulators.
“Commentators made the point that not all short selling is market manipulation just as not all long managers could be accused of market manipulation on the upside (or so-called ‘pump and dump’) strategies,” she said. “Maybe this is a sign that short-selling is finally coming of age.”
IN BRIEF
Brevan Howard Asset Management saw its BH Macro Ltd become the first single-manager hedge fund to make the FTSE250 in June, 15 months after joining the LSE’s Main Market. BH Macro Ltd invests into Brevan Howard Master Fund, a Caymans-domiciled global macro and relative-value strategy launched in 2003.
Newton Investment Management has picked up a $250m (€161m) global equity mandate from the Supervisory Board of Taiwan’s Labor Pension Fund (New System), one of the first the fund has awarded to a foreign manager.
Pensions risk consultant Redington Partners said that the recent rise of long-term inflation expectations above 4 per cent may have increased the value of FTSE100 companies’ pension scheme liabilities by £56bn (€71bn). “Each 0.01 per cent increase adds around £820m to FTSE 100 liabilities,” said co-principal Robert Gardner.
Pension Insurance Corporation (PIC) in the UK picked up two defined-benefit buyout contracts in June. A deal with Delta Pension Plan saw it take on £451m (€570m) of assets, alongside £72m from the Swan Hill Pension Scheme, bringing PIC’s total DB assets up to almost £5bn. PIC also recently launched a new, scheme-specific longevity insurance product.
