FSA follow-up to events in the US

Speaking at a conference on the new Market Abuse regime, Howard Davies said:

The FSA, in common with a number of other regulators around the world, began investigating these allegations immediately after the outrage. In markets of the variety and depth that are present in London, it is of course no easy task and what I can share with you this morning is very much 'work in progress'.

So far, we have concentrated on looking at activity in London on regulated markets, such as the London Stock Exchange, LIFFE and the International Petroleum Exchange and at over-the-counter transactions. In other words, market and off-market trading, in cash and derivatives. We have focussed particularly on airline and insurance stocks and on oil prices. We have also responded to requests from a number of overseas regulators for information on their stocks traded in London. That co-operation which is close and two-way will continue.

Aggregate trading volumes in these markets in the week or so ahead of the outrage were high but not uncommonly so. However, there were a few instances where individual stocks were traded in unusually sizeable amounts. This may have been because funds were positioning themselves ahead of an expected economic downturn. But we are following up on these cases, establishing the professional counterparty involved and the name of their client.

So far, it has been possible to establish rapidly for a number of these cases that there is a ready explanation. For example, a sizeable put option trade in the shares of a British airline turned out to have been on behalf of another airline, as part of an overall hedging strategy.

We have also requested a written report from all the major 'Recognised Investment Exchanges' on their own monitoring over this period and what actions they have subsequently taken. The close co-operation we are getting from RIEs, market participants and other regulators makes for a formidable operation.

We will leave no stone unturned in our search. And we appeal to regulated firms and others to come forward to the appropriate authorities with any further information which they may think is relevant and to make sure they are complying with their own obligations under anti-terrorism and money laundering legislation.

Howard Davies also commented on the more general question of the role of 'short selling' in financial markets:

Short-selling has been extensively debated in the last few weeks. It has been blamed for a variety of problems, including some of the recent fall in equity prices.

In our view, short selling is in normal circumstances a natural and important feature of the market. It provides liquidity and, many would argue, improves 'price discovery'. There are market arrangements designed to protect the interests of investors and, of course, the process should only be possible to the extent that holders of the stock are prepared to lend it on.

But it has to be said that there have been some unattractive examples of aggressive short selling in recent weeks. Consistent with our new powers over market abuse which come into effect on 1 December, if we find specific examples of abusive, and not just aggressive, practice in future, we will act. But we do not see a case for a general prohibition. It has to be for individual stock holders to exercise their own judgement as to whether, to whom and on what terms they will lend.

Notes for editors

1. Howard Davies was speaking today at an FSA conference on the new market abuse regime, held at the QEII Conference Centre, Westminster.

2. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; the protection of consumers; and fighting financial crime.

3. The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.