In addition anyone holding a short position of a quarter of one percent or more will have to declare this on a daily basis, with the declaration of today's positions being due on 23 September.
It is hoped that the move will bring some stability to the financial sector in the wake of Northern Rock and HBOS. At the same time Gordon Brown called for banks to declare their off balance sheet exposure to the market regulators.
Callum McCarthy,Chairman of the Financial Services Authority,commenting on short positions in financial stocks at the Lord Mayor's City Banquet last night said:
"We have been much concerned - as have many - at the volatility and what I would describe as incoherence in the trading of equities, particularly for financial institutions. There is a danger in a trading system which allows financial institutions to be targeted and subject to extreme short selling pressures, because movements in equity prices can be translated into uncertainty in the minds of those who place deposits with those institutions with consequent financial stability issues. We have seen acute examples of this phenomenon in both London and New York this week.
"The FSA has therefore decided to introduce a rule which will take effect from tomorrow, to require both the disclosure of short positions on a daily basis in respect of financial institutions; and a prohibition in any active increase in a net short position in a financial stock by whatever instrument. There will be an exception for market makers to enable them to meet client demand.
"We intend this prohibition to run in the first instance for some 120 days, during which time we will review both its effectiveness and the general policy we wish to adopt in respect of short selling more generally. This is a measure which reflects the present turbulence in markets. It is designed to have a calming effect - something which the equity markets for financial firms badly need. I hope that practitioners will support both the ambition and the chosen means of achieving it."