Shearman & Sterling LLP | FinReg | UK Draft Short Selling Regulations Published
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  • UK Draft Short Selling Regulations Published

    The U.K. government has published a draft version of the Short Selling Regulations 2024. The draft SSR 2024 will replace the existing U.K. Short Selling Regulation, which was onshored from the EU and which is being repealed under the Financial Services and Markets Act 2023. Alongside the draft legislation, HM Treasury has published a Policy Note, which sets out the final policy following the consultations on the short selling regime and on the regulation of sovereign debt and credit default swaps. The response to the first consultation was published in July this year, and the response to the second consultation was published in November 2023.

    The draft SSR 2024 provides that the following are designated activities under the Financial Services and Markets Act 2000 (and so fall under the Financial Conduct Authority's remit whenever any regulated or unregulated person carries them out):
    1. Entering into a short sale of a share.
    2. Entering into a transaction which creates or relates to a financial instrument other than a share, where an effect of the transaction is to confer a financial advantage on the person entering into that transaction in the event of a decrease in the price or value of a share.
    In line with the government's policy of placing the more detailed firm-facing requirements in the regulator’s rulebooks, the draft SSR 2024 grants the FCA power to make designated activity rules relating to the above designated activities, including rules:
    • Requiring arrangements to be made to ensure the settlement of a short sale transaction can be effected when due.
    • Requiring a significant net short position in the issued share capital of a company to be reported to the FCA. The threshold for this notification obligation will, from February 5, 2024, be increased from 0.1% to 0.2%, as provided for in the Short Selling (Notification Threshold) Regulations 2023. This is a notable and more libertarian departure from the EU's regime, where 0.1% remains the lower limit.
    • Providing for exemptions from the short selling obligations, either for certain shares or for certain market participants (e.g., market makers or those engaged in stabilization).

    The draft SSR 2024 also grants the FCA emergency powers, such as the power to ban short sales or impose conditions on short sales and the power to limit short sales following a significant price fall in a financial instrument.

    The draft SSR 2024 requires the FCA to publish the aggregate net short position for each working day for the issued share capital of a company. The aggregation of positions is a change from the FCA's current approach of publishing individual short positions above 0.5% of issued share capital. The change arose from feedback to HM Treasury’s consultation.

    Omitted from the draft SSR 2024 are provisions on supervision and enforcement of the short selling regime. These provisions will be set out in a separate piece of legislation that will cover common aspects of the new designated activities regime (referred to as the DAR SI). Also absent from the draft SSR 2024 are requirements for short positions in sovereign debt or sovereign CDS, including the related reporting requirements. The UK is revoking the short-selling regime for these instruments, for business as usual reporting, again adopting a more liberal approach to markets than in the EU. Sovereign debt and sovereign CDS will, however, be in scope of the FCA's emergency powers.

    Technical responses on the draft SSR 2024 can be submitted until January 10, 2024. HM Treasury intends to lay the full draft SSR 2024 before Parliament in 2024. The draft SSR 2024 will enter into force at the same time that the existing U.K. SSR is repealed and when the FCA’s new rules apply. The FCA is due to consult in 2024 on its proposed approach and new rules. No further indication is provided on timing for the effective date of the new regime.

    The FCA’s consultations will take into account the government's responses to the consultations and will, among other things, cover:
    • Limits on uncovered short selling, including the borrowing and locate requirements that are currently set in the existing U.K. SSR.
    • The reporting regime for net short positions, including reporting deadlines, the form and content of a notification and issued share capital.
    • The exemptions for market making and stabilization activities.
    • Its proposed Statement of Policy on its approach to using the emergency intervention powers.

    For more details, you may like to see our client note, "The UK's Lighter-Touch, Post-Brexit,Short Selling Regime". 

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