UK watchdog clamps down on speculators

THE UK'S financial watchdog yesterday moved decisively to shore up companies' ability to conduct rights issues, clamping down on speculators who have recently taken aim at specific stocks.

The Financial Services Authority (FSA) introduced tough new rules requiring disclosure for anyone "short-selling" a significant amount of stock in a company conducting a rights issue.

Short-sellers aim to profit from selling shares they have borrowed by buying them back more cheaply at a later date.

A series of companies are currently seeking to raise new capital from their shareholders through rights issues, and some, such as HBOS, Britain's biggest mortgage lender, have been targeted by short-sellers.

This week HBOS shares briefly dipped below the rights issue price of 275p, raising the risk that the underwriting banks would be left holding £4 billion (€5.07 billion) of stock in the bank in a move that would almost certainly have closed the rights issue path to other companies.

Short-sellers will from next Friday have to disclose short positions in stocks undergoing rights issues if they amount to more than 0.25 per cent of the total shares outstanding. This is much stricter than the 3 per cent disclosure level that applies to long positions.

Yesterday, shares in HBOS leapt almost 14 per cent to 321.75p. The sudden rule change was prompted by the FSA's realisation that, even though it had strong suspicions that hedge funds were manipulating the stock of companies in the midst of rights issues, the abuse would be almost impossible to prove.

The move stunned the financial services sector, more used to engaging in lengthy consultations with the watchdog over mooted changes. The FSA can circumvent the process in some circumstances if consumers need protection.

"This is about tackling abusive behaviour and making sure that a small number of players do not benefit at the expense of the rest of the market," said one senior official.

Investment banks had lobbied the FSA to take action to support the rights issue process, which they argue could have wider implications for the City of London's standing as a financial centre.

Banks welcomed the move, but hedge funds, which make up the single largest group of short-sellers, were critical.

Some in the market believe the initiative will lead to short covering, where shares are bought to close out a short stock position, in stocks where a rights issue had been rumoured - such as at Bank of Ireland or Alliance Leicester.

Bank of Ireland has consistently denied that it is planning a rights issue, however.