Hedge funds 'dodging shorting ban'

25 September 2008

The new bars on short selling from the Securities and Exchange Commission (SEC) have necessitated a shift in focus from US hedge funds.

Selected financial stocks are now banned from being shorted in America by the regulator, in a bid to suppress negative speculation on the volatile banking system.

The bankruptcy of Lehman Brothers - and, before it, the collapse of Bear Stearns - came about due to severe drops in the value of the firms' stock.

These trends, some analysts suggest, were caused by aggressive shorting from hedge funds.

With the Dow plunging following Lehman's closure, the SEC imposed the new rules last week in a bid to prevent further shorting attacks.

Speaking to the Financial Times, traders said that they were circumventing the anti-shorting regulations by placing negative bets in the credit default swap (CDS) and options markets instead.

“You can still legitimately trade the CDS of banned stocks over the counter even as the SEC seeks jurisdiction over them," one commented.

Another added: "Because with options there is same-day settlement, it is very difficult for regulators to know if shorting is effectively still going on. Realistically, only a clearing firm could actually detect [the shorting]."

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