SIR CALLUM MCCARTHY, MR HECTOR SANTS AND MS MARGARET COLE

6 MAY 2008

  Q120  Chairman: The wider issue, because I will move on to CFDs in a minute.

  Mr Sants: I think, to open up on this point, we have in the past looked in some detail about the validity of shorting and I think it remains the case that thoughtful and considered shorting for justifiable investment purposes is a legitimate investment technique, and I do not think we would want to suggest that it is not. Indeed, we think it contributes to the liquidity of markets and, therefore, probably reduces rather than increases volatility. In general, we do support having a properly transparent market place to enable investors to make informed decisions. The questions around an increase in transparency, both with regard to derivatives and shorts, really focus around whether we can justify that against cost-benefit analyses and the technical difficulties of collecting and delivering data, but the general principle we would agree with; we are always looking for markets to be as transparent as possible without interfering with the reasonable liquidity.

  Q121  Chairman: But you have seen the havoc that that has caused in the past. We are not arguing here for banning it, but the same level of transparency and disclosure for going short as going long seems a reasonable proposition.

  Mr Sants: It is a reasonable proposition.

  Sir Callum McCarthy: Could I just say, if you go back, say 20 years, there was a famous comment once made that insider dealing was a victimless crime. It is absolutely not a view that we have. One of the things that we are particularly concerned about is during the present very fragile market conditions it is something which could cause real economic harm if it is allowed to flourish. We are really determined to try and do all we can on this. We will strain all our powers to deal with it because we absolutely reject any implication at all that this is something that should be an acceptable part of practice.

  Q122  Chairman: On contracts for difference, on equities, should they be subject to greater trade reporting transparency. The trade reporting disciplines of the cash equity market do not apply to it. Should that discrepancy not be addressed?

  Mr Sants: On CFDs, we collect data with regard to market abuse, so we are already collecting that data. The issue around CFDs is transparency and visibility with regard to people making informed decisions. It is not hampering our efforts with regard to market abuse because we already have the data input into it. But to my earlier point, in general, the presumption of the FSA is as long as it is not impeding liquidity, and there is an interaction here between transparency and liquidity, we believe full transparency is the right way forward, and that is the backdrop to our current consultation paper with regard to CFDs, but we do need to balance up that presumption of the benefits of transparency against a full understanding of the costs and practicality of delivering it, and, as you will probably know with regard to CFDs, an element of the industry, particularly the investment banks, have raised issues around the practicality of the cost of delivering a more transparent regime, but our presumption is that the regime should be more transparent and we will be coming forward with our proposals for this in due course.

  Q123  Chairman: Sir Callum, I saw you nodding enthusiastically there. Is your impending liberation making you agree with me even more on that?

  Sir Callum McCarthy: Chairman, I am very conscious that the last time I appeared before you, you very handsomely thanked me for giving evidence before you. I am rather worried how many final farewell performances I am going to have!

  Q124  Chairman: Okay. On the short-selling issue, if you take that up and keep in contact, we will be happy. Sir Callum, the remarks I did make the last time I endorse heartily and I think we are quite sure this time will be your last performance. There is no Frank Sinatra here, is there? Can I thank you for your co-operation with the committee and wish you well in your endeavours in the future, and thanks for everything you have done for the Committee and the FSA.

  Sir Callum McCarthy: Thank you very much. I am grateful.