The UK’s HM Treasury has announced much anticipated proposed changes to its short selling regime as part of the next phase of the UK’s breakaway from the European Union since Brexit.
Named the Statutory Instrument (SI) the new tool replaces existing European law which has been retained since Britain left the EU at the start of 2020. HM Treasury is now accepting comments on the proposals until 10 January next year, with plans to implement the changes in 2024 “subject to parliament time”.
“Replacing retained EU law will enable firms to benefit from a streamlined and accessible legislative framework for financial services, where rules adapt over time in response to changing practices in an agile manner,” said HM Treasury in its findings.
Central to the changes is the greater decision-making power awarded to the UK’s Financial Conduct Authority (FCA) which under the new regime – if approved in its current state – would gain rulemaking and intervention powers around setting requirements and exemptions.
The changes follow the results of the Short Selling Review, published in July, and the Short Selling Regulation Consultation, delivered earlier this month.
The new instrument defines and sets out the designated activity of short selling of shares and related instruments. It also empowers the FCA to exempt certain shares from the requirements and to make the rules requiring person engaged in short selling activity concerning shares to comply with specific requirements.
“This is part of a wider effort to enhance transparency, oversight over short selling activities in the capital markets. Most of the time, short selling plays a key role in price discovery by reflecting negative sentiments and providing information about market expectations,” chief executive of VoxSmart, Oliver Blower told The TRADE.
“However, on the occasions when executed improperly, it has the potential to disrupt market integrity. This is why we are seeing more and more financial institutions looking to reconstruct their trades to help authorities assess whether short-selling activities adhere to established rules.”
The proposal gives the FCA a rulemaking power to set out aspects of the net short position notification regime and if approved would require the watchdog to aggregate and publish net short positions received by each issuer. It also requires the watchdog to publish a list of shares to which certain rules apply.
Importantly, the FCA has been given power to exempt market making activities and stabilisations from certain short selling requirements. It also allows the watchdog emerging powers that permit it to intervene in “exceptional circumstances”. The rules set out that the FCA must publish a statement of policy setting out further detail of how it considers it will use its powers to intervene in said circumstances.
According to the proposal, the new initial notification threshold for a net short position reporting to the FCA should be 0.2% of issued share capital.
HM Treasury confirmed the FCA is set to consult with market participants on restrictions on uncovered short selling, how firms should report net short positions to the FCA, an exemption for market making and stabilisation activities, and its approach to using its emergency intervention powers.
The FCA is also expected to define arrangements and criteria for the list of reportable shares and how it will publish aggregated net short position reports.
Short selling globally
Short selling is the practice of selling a security that is borrowed – or not owned by the seller – with the intention of buying it back later at a lower price in order to make a profit.
The practice has come under fire from regulators globally as of late with many reviewing their oversight regimes.
It was controversially re-banned in South Korea until 2024 earlier this month. Regulators in the region initially banned the practice due to excessive market volatility levels. They moved to re-ban the practice until next year in response to “naked short selling” – a process that regulators said undermined the price formation process. The decision sparked criticism from several global banks.
The Thai Stock Exchange also reportedly moved to restrict the practice earlier this month.