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Ban on short selling extended by SEC

US regulators on October 1, 2008 said they would extend a temporary ban on short selling of financial stocks aimed at curbing potential market abuse. The SEC said the measures – due to expire on Thursday night – would now last until the third business day after the $700bn plan to rescue the financial system is enacted into law, but in any case, no later than October 17.

The Managed Funds Association, who represents the interests of hedge funds, said in a letter to the SEC on Tuesday that it was opposed to an extension of ban and advising that SEC should include an exemption for hedging transactions – including those that involve convertible bonds and convertible preferred securities as the ban has “effectively frozen this source of capital for financial companies, because investors refuse to purchase convertibles and provide financing to these companies without the ability to hedge these investments.” Other foreign regulators have provided such an exemption from their short selling bans.

Short sellers try to profit by betting stock prices will fall. In a short sale, traders borrow shares from their broker that they then sell. If the price drops, they buy back the stock, return it to their broker and pocket the difference.

The US Securities and Exchange Commission issued emergency orders two weeks ago as part of a broader government strategy to shore up confidence in the markets. The measures included barring short sellers from trying to profit from price declines in financial stocks and requiring hedge funds and other investors to disclose their short positions. Similar steps were taken in the 1929 stock market crash, when Herbert Hoover, the US president, railed against those selling company shares they did not own. It has happened since around the world, including in the Asian financial crisis of the late 1990s. It is happening once again amid the current financial turmoil.

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