The UK Government is changing reporting requirements for short selling and the authorisation / restriction of shorting via new rules which put the Financial Conduct Authority in charge of administering limits set by the UK Treasury.Â
The government’s new statutory instrument (SI) will allow the Treasury to give the FCA rulemaking, supervisory and enforcement powers, without requiring all firms in scope of the activity to seek FCA authorisation.
For example, the SI sets out definitions of key terms, such as the definition of a short sale, and gives the FCA rulemaking powers to expand on these definitions in more detail where required. It also empowers the FCA to exempt shares from requirements and requires the FCA to publish a list of shares to which certain rules apply.
These measures are in response to feedback in December 2022’s Call for Evidence, which suggested that a ‘positive’ list of in-scope shares would be more beneficial for market participants than the current ‘negative’ list of exempt shares.
Short selling is currently regulated the UK by the Short Selling Regulation (SSR). This is the UK version of the EU Short Selling Regulation (EU SSR), as incorporated into UK law by the European Union (Withdrawal Act) 2018.
The scope of financial instruments covered in the SI is also different to the European Union’s 2012 Short Selling Regulation, which this new draft regulation will replace. Article 16 of the SSR exempted shares traded on a UK trading venue that are principally traded outside the UK from various SSR requirements, including reporting requirements and restrictions on uncovered short selling. The designated activity for short selling in the government’s new instrument has a broader scope of shares traded on a UK trading venue and related instruments.
Additionally, the Treasury intends to deploy a separate SI to increase the initial notification threshold that was lowered in January 2021 in response to pandemic-era market uncertainty. The SI will increase the threshold for reporting net short positions back to its original 0.2% from 0.1% of issued share capital in due course.
This requires the FCA to publish aggregated net short positions based on individual position
notifications it receives. This is a change to the current regime where the FCA publishes individual net short positions above 0.5% of issued share capital, which was announced in the Government Response to the Short Selling Review.
The UK government says it will welcome comment on the draft SI before 10 January 2024.
As set out in the government’s ‘Building a Smarter Financial Services Regulatory Framework: Delivery Plan’, the government will create an SI regulating certain common aspects of designated activities (DAR SI), to consolidate legislation and reduce complexity for firms carrying out more than one designated activity.
The government expects to publish the DAR SI for technical checks early next year and expects it to contain a set of cross-cutting supervision and enforcement provisions that will apply to all designated activities, including short selling.
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