News

17/06/2008

Letter to the Editor of the Financial Times: Stock lenders should also face disclosure rules

From Mr Peter Butler

Sir, The Financial Services Authority’s move to shore up rights issues by requiring disclosure from short sellers (report, June 14) is welcome, but may I suggest another simple disclosure that would be a real benefit to directors who feel under pressure from shorting.

Shorting normally requires borrowing of stock to facilitate short selling. Stock lenders retain economic rights to the stock they have lent but their holdings are removed from the stock register. Directors therefore have no idea who is lending the stock.

This can be resolved by requiring stock lenders to disclose lending activity to the company. This would allow directors who believe shorting activities are harming the long–term prospects of the company to contact lenders and ask them to recall their lent stock. Stock lenders that are major institutions understand that it is best practice to recall lent stock in controversial situations – but in practice there are very few instances of stock being recalled.

The remedy of disclosure would allow directors to contact their real owners (or their agents) and argue the case for recalling stock. Such recalls would reduce supply to the stock lending market and at least drive up the cost of borrowing stock and quite possibly have the effect of increasing the share price – which itself might result in more short sellers closing out their positions.

Shorting is not always disadvantageous to long-term shareowners – but where it is the directors should have the power to act and remedy the situation.

Peter Butler,
Chief Executive,
Governance for Owners,
London EC2N 2AN, UK