The Financial Services Authority (FSA) has imposed a new rule designed to have a “calming effect” on the market for shares in financial firms.  

Speaking at the Lord Mayor’s City Banquet last night, Callum McCarthy, chairman of the FSA, announced the regulator would require traders to disclose short positions on financial institutions on a daily basis. It will also prohibit any active increase in net short positions on shares in financial services firms. The measures will initially be imposed for 120 days, during which time the FSA will review its overall policy on short selling.

Short-selling involves borrowing the shares of a certain firm from one party to sell to another in the hope that the share price of the firm in question will fall. This will then result in a profit for the short seller when the shares are bought back to return to the original party.

The FSA is concerned that such activities can translate into a drop in confidence among the customers of the banks targeted by short seller. This could then prompt bank customers to withdraw any money they have placed in savings or current accounts, causing a run on the bank, such as was the case for Northern Rock last September.

McCarthy explained: “We have been much concerned – as have many – at the volatility and what I would describe as incoherence in the trading of equities, particularly for financial institutions.

“There is a danger in a trading system which allows financial institutions to be targeted and subject to extreme short selling pressures, because movements in equity prices can be translated into uncertainty in the minds of those who place deposits with those institutions with consequent financial stability issues. We have seen acute examples of this phenomenon in both London and New York this week.”