Aniqah Rao, associate, markets regulation at the Alternative Investment Management Association (AIMA), summarises changes to short-selling rules designed to drive growth and competitiveness in the UK financial sector
HM Treasury (HMT) has been engaged in a comprehensive review of the UK's onshored financial services legislation. In December 2022, as part of the Government's “Edinburgh Reforms” — a package of 30 reforms designed to take advantage of Brexit freedoms and improve the UK’s financial services regulatory framework — HMT published a Call for Evidence on the Short Selling Regulation to explore how the UK should reform the regulation of short selling.
The EU's Short Selling Regulation (EU SSR), onshored in the UK post-Brexit, was introduced in 2012 following concerns about a lack of transparency on whether, and how, short selling was impacting prices and increasing risks to financial stability. The EU SSR established rules on notification of short positions to regulators, as well as public disclosure of larger short positions. It also granted powers to regulators to impose short selling restrictions on any financial instrument in “exceptional circumstances”.
HMT is now taking steps to liberalise short selling rules and to drive growth and competitiveness in the UK's financial sector. This has entailed evaluating the nature of reporting and disclosure requirements, the impact of short selling bans and specific provisions relating to sovereign debt and credit default swaps (CDS).
The Alternative Investment Management Association (AIMA) has engaged actively with HMT and the UK's Financial Conduct Authority (FCA) throughout the review, highlighting the healthy role that short selling plays in the proper functioning of financial markets by supporting price formation and acting as a check on corporate wrongdoing.
We called, in particular, for a removal of the public disclosure requirement — given this disincentivises short positions due to the risk of copycat trading — and improvements to the burdensome supervisory notification requirements. We also pushed for the replacement of the existing ‘Exempt List' of shares subject to short selling disclosures with an ‘positive' in-scope list of shares to support compliance with the regime.
In July 2023, HMT announced a number of significant and welcome amendments to the UK SSR — as AIMA had advocated. These included replacing the individual public disclosure regime with an aggregated net short position disclosure regime; increasing the supervisory notification threshold from 0.1 per cent of issued share capital to 0.2 per cent; and requiring the FCA to publish a ‘positive' list of in-scope shares to which certain rules apply. These also removed restrictions on uncovered short positions in UK sovereign debt and credit default swaps (CDS) and abolished requirements to report sovereign debt and CDS positions to the FCA.
In February 2024, the first of the changes, an increase of the notification threshold for net short position reporting to the FCA, came into force via a statutory instrument. The remaining reforms will be implemented through a second statutory instrument, The Short Selling Regulations 2024, and subsequent FCA rulemaking.
The draft statutory instrument is undergoing finalisation and will be laid before Parliament this year. The FCA will then consult on the details of the changes, such as how firms should report net short positions to the regulator, the FCA’s approach to using emergency intervention powers and the criteria for a list of reportable shares. While this process will take time, we hope new rules might be finalised in the course of 2025 — to the ultimate benefit of the UK’s financial market.
