relevant info on short selling

relevant info on short selling

Didn't find your answer?

hi,

i am seeking to find out whether it is legal for a financial institution holding entirely a convertible bond in a company to short sell the companys shares so as to obtain a preferential conversion rate (lets say theoretically shorting has had a major effect on the companys share price in the short term). if it is legal then does it make a difference if the bond holder is party to company confidential info that isnt in the public domain (im assuming bond holders usually have terms along these lines)

If someone could point me to a good source of UK information on the subject that would be great.

the FSA have been their usual unhelpful selves .... you would never guess promoting public confidence and public understanding in the market were 2 of their statutory objectives

many thanks in advance
david jefferson

Replies (1)

Please login or register to join the discussion.

avatar
By Davidbonar
04th Jul 2007 16:15

Beware insider dealing
I'm afraid I can't answer the first part of your question as to the legality of the short selling in the absence of confidential information. I don't know of any rule that would prevent it, and logically I don't see why it should be any different from short selling in general. I do know that many financial institutions are barred by their own internal rules from short selling in any circumstances (because it's a risky trade with potentially unlimited downside), but I presume this isn't the case for the institution you have in mind, otherwise you wouldn't be asking the question.

I don't think bondholders are generally party to confidential information which is not in the public domain. I work in debt investor relations for a FTSE 100 company, and we are very careful when we meet with the institutions that hold our debt not to divulge non-public information.

However, if a bondholder did have confidential information, and if that information would be likely to affect the share price if it were made public (ie it is price-sensitive information), then that would probably be "inside information" and dealing in the shares would then probably constitute "insider dealing", a criminal offence under Part V of the Criminal Justice Act 1993. I say "probably" because it's not entirely straightforward and there are other conditions to be met for there to be a crime, but it's not an area where you would want to be taking a risk.

So the short answer to the second part of your question is yes, it does make a difference.

Thanks (0)