Banning The Fungible Drum

October 2008

Newsletter 7 View ‘Banning The Fungible Drum [PDF] ’


Has the financial services authority succeeded with its interim ban on short selling?

Many people, lawyers included, reacted with surprise to the announcement by the Financial Services Authority (the FSA) in September 2008 that there was to be a ban on the short selling of shares in the UK financial sector. The hedgies and the shorties reacted with consternation, if not outrage, at the summary execution of their favourite pet. How could something that has been a perfectly legal and important part of the securities market for hundreds of years come to be outlawed overnight and without the passing of primary legislation? Words such as “unprecedented” issued forth as the market struggled to come to terms with what the ban might mean. It wasn’t long before the struggle moved across to the lawyers to see if there might be a way round the prohibition. The speakeasies in the world of the fungible received their first clients.

A fungible is something whose individual units are capable of mutual substitution. Crude oil is a fungible commodity because when it is bought and sold any individual unit of oil may be substituted for any other. The seller agrees to sell and the buyer agrees to buy units of the commodity mutually substitutable for any other units of the commodity. The same is so for shares in a company. When the buyer contracts to buy shares in a company he does not do so in relation to the actual share certificates with their unique numbers upon them, he just buys shares. The actual shares acquired when the deal is closed are fungible because any of the shares in the company will do.

View ‘Banning The Fungible Drum [PDF] ’