Shearman & Sterling LLP | Financial Regulatory Developments Focus | UK Post-Brexit Secondary Legislation on Short Selling Published
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  • UK Post-Brexit Secondary Legislation on Short Selling Published
    Draft U.K. secondary legislation has been published to onshore the EU Short Selling Regulation on the day the U.K. exits the EU. The draft Short Selling (Amendment) (EU Exit) Regulations 2018 (or U.K. SSRs) are expected to be laid before Parliament in Autumn 2018 and to come into force mostly on the day the U.K. withdraws from the EU. The draft U.K. SSRs are made under the provisions of the European Union (Withdrawal) Act 2018 to address failures of retained EU law relating to short selling to operate effectively and other deficiencies arising from Brexit.

    The explanatory guide to the U.K. SSRs states that changes for firms with shares admitted to trading on a U.K. venue should be minimal. The procedure for notifying U.K. instruments to the Financial Conduct Authority will be kept and instruments admitted to trading on U.K. venues will continue to have the same restrictions applied to them.

    The U.K. SSRs will amend the Financial Services and Markets Act 2000, as well as the EU SSR (incorporated into U.K. law by the European Union (Withdrawal) Act) and level 2 legislation under it for U.K. purposes after Brexit takes effect. Changes made by the draft U.K. SSR include:
    • the U.K. SSR will only cover instruments admitted to trading on U.K. trading venues and U.K. sovereign debt and will not cover instruments admitted to trading or traded on an EEA trading venue or the sovereign debt of EEA governments.
    • provisions facilitating cooperation and coordination between EU national regulators will be deleted.
    • the FCA will assume the European Securities and Markets Authority's responsibility for collating and publishing the list of shares principally traded in a third country, including shares which have their principal trading venue outside of the U.K. This relates to the EU SSR exemptions from the reporting requirements, the buy-in regime and restrictions on uncovered short selling for shares which are principally traded in a third country. To ensure continuity, the FCA may recognize ESMA's existing list for up to two years following exit day.
    • provision to ensure that notifications by market makers of their intention to use the exemption available under the EU SSR made to the FCA before exit day will remain valid. European market makers will be required to join a U.K. trading venue and submit a notification to the FCA at least 30 days ahead of exit day to benefit from the exemption.
    • the FCA will continue to have powers to restrict short selling in the event of a significant fall in the price of a share or in response to a threat to U.K. financial stability or market confidence.
    • provision to ensure that U.K. firms can continue to use U.K. sovereign CDS to hedge correlated assets or liabilities issued by issuers located outside of the U.K. anywhere in the world, instead of only in the EU. This is another example of Brexit being used to fix problematic EU legislation from a third country perspective as part of the "global Britain" agenda, and builds on the separate proposals relating to settlement finality designation.

    As discussed in our previous posts, HM Treasury has also published draft secondary legislation and proposals in other areas, such as a temporary permissions regime for EEA firms, a temporary recognition regime for non-U.K. CCPs and a proposed framework for U.K. settlement finality designation. The U.K. financial services regulators are expected to consult in the autumn on how changes will be made to their rules in these and other areas. Further draft financial services legislation is expected to be published in the lead up to Brexit.

    View the draft U.K. SSR.

    View the explanatory guidance to the draft U.K. SSR.

    View details of the draft regulations establishing a temporary permissions regime.

    View details of the temporary recognition regime for non-U.K. CCPs.

    View details of the proposed framework for settlement finality designation.

    View details of the proposed approach to onshoring EU legislation.

    View details of the EU (Withdrawal) Act 2018.

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