On 22 November 2023, HM Treasury (HMT) published a draft of the Short Selling Regulations 2024 (the Draft SI) and an accompanying explanatory policy note (the Note).
The Draft SI and Note follow the UK Government's response to HMT's December 2022 call for evidence on the Short Selling Regulation (the SSR Response), dated July 2023, and HMT's consultation relating to the short selling of sovereign debt and sovereign credit default swaps (the CDS Consultation). For more information on the SSR Response and the CDS Consultation, please see our recent article (available here).
The Draft SI implements the measures signposted in the SSR Response and the CDS Consultation. Specifically, the Draft SI:
- seeks to replace retained EU law related to short selling with a new UK regulatory framework for short selling. Most notably, the Draft SI defines short selling shares and related instruments as a "designated activity". In doing so, HMT can give the Financial Conduct Authority (FCA) rulemaking, supervisory and enforcement powers, in relation to short selling, without requiring all firms conducting such activity to seek FCA authorisation;
- empowers the FCA to:
- exempt certain shares from the requirements. The FCA will also be required to publish, and keep regularly updated, a list of shares to which the rules apply. This is in line with the SSR Response in which respondents raised that a 'positive' list of shares in scope of the regime would be more beneficial for market participants than the current 'negative' list of exempt shares;
- make rules requiring a person engaged in the short selling of shares to comply with specified conditions or requirements. The Note provides that this power includes, but is not limited to, the ability to impose restrictions on uncovered short selling to such as borrowing and locate arrangements. Such powers will be used, if the FCA considers it appropriate to do so, to ensure the settlement of trades related to short selling;
- exempt market making activities and stabilisations from certain short selling requirements if they are either a member of a UK trading venue or a trading venue in an overseas jurisdiction for which HMT has made a determination.
- sets the initial notification threshold for net short position reporting to the FCA at 0.2% of the issued share capital of in-scope issuers, up from the current 0.1% (restoring the reporting threshold back to where it was before the Covid pandemic);
- requires the FCA to publish the aggregate net short positions they receive by issuer, doing away with the 0.5% public disclosure regime. The new figure will be published based on positions held on each working day;
- includes a placeholder for: (i) a regime that will allow HMT to make determinations in relation to overseas jurisdictions (which the Note confirms will be included in the Draft SI when laid before Parliament); and (ii) a transitional provision to carry forward the existing equivalence determination for the EEA;
- includes emergency intervention powers for the FCA to require additional short selling-related information, and to restrict short selling in exceptional circumstances such as where there is a serious threat to financial stability or market confidence, or to prevent a disorderly decline in the price of a financial instrument; and
- requires the FCA to publish a statement of policy setting out further details of how it considers it will use its powers to intervene in exceptional circumstances. The Note highlights that this is in line with the SSR Response where respondents suggested greater 'upfront clarity' on the FCA's use of short selling emergency powers.
The Note states that the policy approach of the Draft SI is final, but that the Government is seeking comments on its drafting and other technical aspects by 10 January 2024.
In terms of next steps, HMT plans to lay the Draft SI before Parliament in 2024, subject to whether Parliamentary time allows. Further, the FCA is expected to consult with market participants on the following topics in 2024 as it supports the development of the UK's new short selling legislative framework:
- restrictions on uncovered short selling, including provisions related to borrowing and locate requirements;
- how firms should report net short positions to the FCA, including reporting deadlines, the form and content of a notification and issued share capital;
- an exemption for market making and stabilisation activities, taking into account feedback in the SSR Response on ways to streamline the notification regime, including how quickly exemptions can be applied;
- its statement of policy setting out its approach to using its emergency intervention powers;
- arrangements and criteria for the list of reportable shares, including the criteria that in-scope shares must be principally traded on a UK regulated market or multilateral trading facility; and
- arrangements for how it will publish aggregated net short position reports.
On the same day as the publication of the Draft SI and Note, HMT published its response to the CDS Consultation (the CDS Response). The CDS Response sets out HMT's final policy position for the regulation of the short selling of UK sovereign debt (i.e., gilts) and credit default swaps. In particular, the CDS Response confirms that the government will:
- remove existing short-selling requirements for investors when creating short positions in UK sovereign debt or sovereign credit default swaps, and related reporting requirements under the UK's new short selling framework; and
- retain emergency intervention powers in relation to such instruments. As part of these retained powers, the Government will require the FCA to set out its approach to using these powers upfront, in order to provide the market with greater clarity.
The CDS Response highlights that the FCA will consult on this approach in due course.
UPDATE: On 27 November 2023, the UK Government published the Short Selling (Notification Threshold) Regulations 2023 (the SS Regulations), accompanied by an explanatory memorandum (the Memorandum) and an impact assessment (the Assessment).
The SS Regulations amend Article 5(2) of the UK's retained version of Regulation (EU) No 236/2012 (i.e., the UK Short Selling Regulation), to raise the initial threshold for the reporting of net short positions to the FCA from 0.1% of the issued share capital of a company to 0.2%. The 0.2% threshold will apply from 5 February 2024, when the SS Regulations come into force.
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