FSA's actions on transparency ‘not working'

The Financial Services Authority's efforts to make shorting more transparent have not worked, according to researchers at ABN Amrq.
Paul Walton, author of a report on the stock lending process that lies behind conventional shorting, says hedge funds are still able to enter into short positions that no one knows about, while long-term investors have to reveal their trades.
The FSA started a probe last year after falling markets prompted calls for greater transparency. From September, Crest, the settlement agency, started supplying data on stock lending in individual companies.
However, the data are delayed by five working days and only supplied in aggregate. Individual amounts of borrowing cannot be identified.
Mr Walton said the data do not meet the criteria put forward by the FSA a year ago. "If the system was problematic a year ago, then it still is," he said.
The FSA said: "We remain alive to market developments in this area and will keep the functioning of
this system under review." ABN Amro has used alternative figures from Securities Finance Systems, a private company, to analyse borrowing. One of its main conclusions is that, far from increasing when markets are falling, stock borrowing declines.
As markets have rallied this year, so has borrowing. Mr Walton said: "Lending is pro-cyclical rather than being a factor that depresses the market."
The ABN report also finds that one of the most common uses of borrowing is for arbitrage trades in pairs of stocks. For instance, a hedge fund will take out a long position in one company and a short one in a similar company in the same sector for arbitrage purposes.
To go short in a stock, a hedge fund borrows from a long-term owner for which it pays a fee. It sells the stock into the market, hoping to buy back later at a lower price and pocket a profit.
Last month, it emerged that market-makers for Room Service, a shell company, had created settlement problems by uncovered short selling of more shares in the company than existed. The FSA has launched an investigation.

FSA chief probes unit trusts for abuses

By Charles Pretzlik and Jane Fuller Britain's chief financial regulator believes the £220bn unit trust industry may have fallen victim to abuses similar to those that have rocked US mutual funds.
Callum McCarthy, chairman of the Financial Services Authority, said yesterday: "We're investigating to see whether there have been problems of [market] timing." Mr McCarthy told the Financial Times, in his first interview since taking on the role: "We have done a first cut, and that first cut has emphatically not given us the answer `no, there is no prospect of this happening in the London markets.'
"We're therefore doing a second cut to try to establish the position more clearly."
US asset management groups have lost billions in market value and funds have suffered big outflows since trading abuses came to light. Eliot Spitzer, New York state attorney-general, warned yesterday that his settlements with mutual fund companies involved would be so "painful" that some would cease to exist.
US mutual fund companies gave professionals an advantage over private investors by helping them to trade at stale prices.
UK unit trust prices are set once a day using models that try to reflect the value of the underlying assets.
However, this does not always take full account of earlier movements in overseas markets or forthcoming dividend payments.
The FSA has already asked UK fund managers for details about their dealings with such investors as time-zone arbitrageurs. It is analysing the data to search for suspicious trades.