The new UK short selling regime: another step away from the EU post-Brexit

HM Treasury published, on 22 November 2023, a draft of the Short Selling Regulations 2024 (SSR 2024), along with a policy note. The draft statutory instrument (SI) is intended to establish a new regulatory framework to replace the retained Short Selling Regulation (the UK SSR), which was based on Regulation (EU) 236/2012 (the EU SSR) and incorporated into UK law by the European Union (Withdrawal Act) 2018. This represents another step in the UK government’s programme of financial services regulatory reform following the UK’s exit of the European Union. 

Short selling is the practice of selling a security that is borrowed or not owned by the seller with the intention of repurchasing it later at a lower price to make a profit. The EU SSR was introduced to respond to concerns regarding the short selling of shares in financial institutions and of euro area sovereign debt, as well as a lack of information and transparency to the market and authorities with regard to the effect of short selling on prices and ultimately, financial stability. 

Pursuant to the Financial Services and Markets Act 2023 (FSMA 2023), the UK SSR will be repealed on a date yet to be determined. In December 2022, HM Treasury launched a call for evidence in which it sought views on the new regulatory framework to replace the UK SSR. The call for evidence closed in March 2023, and the government published its response in July 2023. HM Treasury ran a separate consultation in July 2023 on aspects of the UK SSR related to sovereign debt and credit default swaps (CDS), and published its response to that consultation alongside the draft SI. 

The key highlights of the SI include provisions relating to: 

1.Scope

The SI defines short selling as a designated activity, which will give the FCA a range of rulemaking, supervisory and enforcement powers with respect to short selling, including by firms that are not subject to FCA authorisation. Further, it requires the FCA to publish a list of shares to which certain rules apply and empowers the FCA to exempt shares from certain notification and other requirements. 

2. FCA rule-making powers

The SI empowers the FCA to make rules requiring short sellers of shares to comply with certain conditions or requirements, such as imposing restrictions on uncovered short selling to protect against settlement risks. 

3.Disclosure

The initial notification threshold for net short positions has been set at 0.2%. The SI empowers the FCA to set out certain elements of the net short position notification regime, such as detailing how to calculate a net short position and when a notification is required. It also requires the FCA to aggregate and publish net short positions notified on any working day in respect of the issued share capital of a company. 

4. Market maker exemption 

The SI provides the FCA with the power to exempt market making activities and stabilisation from certain short selling requirements. The exemption will be available to members of UK trading venues and trading venues in other jurisdictions for which HM Treasury has made a determination. The existing equivalence determination for the EEA will remain in place for a transitional period. 

5. Emergency powers

The SI gives the FCA the power to intervene in exceptional circumstances, such as requiring notifications of short positions or lending fees, prohibiting or imposing conditions on short sales, or restricting short selling after a significant fall in the price of a financial instrument. The FCA can exercise these powers where it considers that there is a threat to financial stability or in order to prevent a disorderly decline in the price of a financial instrument, and the benefits of an intervention outweigh the detrimental impact of such an intervention on financial markets. 

The FCA must publish a notice of any decision to exercise these emergency powers, and it must review any requirement, prohibition, condition or restriction on a regular basis. The SI also requires the FCA to publish a statement of policy on how it considers it will use these intervention powers. 

Differences between the UK SSR and the SSR 2024

Generally, the overarching framework relating to short selling remains unchanged between the UK SSR and the SSR 2024. The core definitions and requirements remain largely the same. 

The SSR 2024 will reinstate the original requirement for firms to notify the FCA of net short positions above 0.2% of issued share capital. This threshold was lowered to 0.1% in 2021 in response to market uncertainty caused by the Covid-19 pandemic. The government has laid a separate statutory instrument that will increase the threshold in the UK SSR to 0.2% from 5 February 2024. 

In line with the wider changes introduced as part of the UK’s post-Brexit strategy, the SSR 2024 aims to build on the government’s approach to build a Smarter Regulatory Framework for financial services. Under the new regime, detailed rules will be set by the FCA in its Handbook within a legislative framework as opposed to the detailed rules being set out in legislation. These regulatory reforms are intended to achieve greater flexibility and adaptability. 

Another difference between the two regimes is that the SSR 2024 provides for a broader scope of shares traded on a UK trading venue and related instruments to be covered by the FCA’s rules, whereas the UK SSR exempts shares that are principally traded outside the UK from certain requirements. The FCA will have the power to exempt shares from requirements where appropriate and will be required to publish a list of all shares subject to its rules on short selling, which could ultimately result in a narrower set of shares being subject to the short selling rules. 

In addition, whereas the UK SSR contains provisions relating to sovereign debt and sovereign CDS, the SSR 2024 will not impose restrictions on the uncovered short selling of UK sovereign debt and CDS, and it will remove reporting requirements with respect to sovereign debt and CDS positions. However, the FCA’s emergency intervention powers with respect to these products are retained. 

Furthermore, under the SSR 2024, the FCA will be required to publish aggregated net short positions based on individual position notifications it receives from short sellers, whereas the UK SSR requires the FCA to publish individual net short positions above 0.5% of issued share capital, including the identity of the short seller. The new approach will set out the overall net short position in a particular company’s shares but avoids disclosure of the names of individual short sellers as is currently the case under the UK SSR.  

Next steps

HM Treasury intends to lay the final SI before Parliament in 2024, subject to Parliamentary time. Whilst the policy approach on this area is settled, some drafting and technical aspects may change in the final SI. The deadline to provide any technical comments to HM Treasury is 10 January 2024. 

The FCA has indicated that it will consult in 2024 on how it plans to exercise its rule-making powers under the new regime. The final SI will commence at the same time as the FCA makes new rules, alongside the repeal of the UK SSR.

The draft SI does not contain any supervision or enforcement provisions. Instead, these will be covered in a separate SI on the designated activities regime (DAR), which the government plans to publish in early 2024. The DAR SI will contain cross-cutting supervision and enforcement provisions that apply to all designated activities, including short selling.