Temporary short-covering ban sharply curtails trading of financial convertibles

By Rebecca Melvin

New York, Sept. 19 - Trading of financial sector convertibles was sharply curtailed Friday after the Securities and Exchange Commission enacted a temporary ban on short selling of 799 financial stocks, market players said.

The SEC called the move a "temporary emergency action," aimed at protecting the integrity and quality of the securities market and at strengthening investor confidence. Similar action was taken by the U.K. Financial Services Authority.

The SEC order will remain in effect until the end of business on Oct. 2. But it may be extended beyond 10 business days if the commission deems an extension necessary in the public interest and for the protection of investors. It will not extend the order for more than 30 calendar days, however.

Meanwhile, trading of financial convertibles by hedge players was virtually shut down, and although outright players were presumably unaffected, sources said there were no bids in the market, and mark-to-market was difficult to ascertain.

"Hopefully there's some more clarification from the Fed over the next couple of days," a New York-based sellside desk analyst said.

Meanwhile, prices were most definitely down, with one source hazarding a guess that the financials were down by five points. And with financial equities running up strongly, it wasn't good for business.

"U cannot hedge anything! Therefore I can't bid a customer to trade on swap anything! Biz has shut down. Same with options market," an East Coast-based sellside trader said via e-mail.

The temporary ban came after the SEC decided Wednesday to ban the practice of naked short selling.

SEC chairman Christopher Cox said in a release Friday that the action "is temporary in nature and part of a comprehensive set of steps being taken by the Federal Reserve, the Treasury, and the Congress" to restore equilibrium to the financial markets.

In addition to what it called a "time-out" to aggressive short selling, the SEC also is temporarily requiring institutional money managers report their new short sales of certain publicly traded securities, and temporarily easing restrictions on the ability of securities issuers to repurchase their securities.

Money managers are already required to report their long positions in these securities.

Easing restrictions on repurchasing will give issuers more flexibility to buy back their securities, and help restore liquidity.

The commission, which acknowledged that under normal market conditions, short selling contributes to price efficiency and liquidity, said it may consider additional steps as necessary to protect the integrity and quality of the securities markets and strengthen investor confidence.

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