Short Selling Regulations 2024

In view of UK’s efforts to eliminate EU retained regulation (REUL) and replace it with meaningful, proportionate, and commensurate legislation that suits the UK financial market, the HM Treasury has now published its proposed framework regulation to set the stage for the replacement of the currently retained EU Short Selling Regulation (UK SSR). The new Draft Statutory Instrument (SI) titled The Short Selling Regulations 2024 would primarily designate short selling as a designated activity pursuant to the new Designated Activities Regime (DAR) established in the FSMA 2023 and provide the Financial Conduct Authority (FCA) with the necessary powers to specify related obligations of financial market players and to enforce the regulation and any provisions made by the FCA thereunder.
(1) Short selling as a designated activity: Specifically, the Draft SI specifies the following two activities as designated activities pursuant to section 71k of the FSMA 2000:
– Entering into a short sale of a share which involves the selling of a share that the seller does not currently own but intends to buy later at a lower price, expecting the share price to decrease.
– Entering into a transaction involving any financial instrument where the transaction’s effect is to provide a financial advantage to the individual or entity engaging in the transaction in the event of a decrease in the price or value of a share.
(2) Extension of powers to the FCA: The Draft Short Selling Regulations 2024 grants powers to the FCA to require notification of a „significant net short position in the issued share capital of a company“, including specifications of when to make such notifications and the means to deliver the notification. It also provides powers to the regulator to grant exemptions from net short position notifications for certain shares or for market making or financial stability purposes.
(3) Requirement to publish net short positions: The Draft SI requires the FCA to publish the notified aggregate net short position on a daily basis, however, no later than two working days after notifications of specific positions have been made. It also sets out that the FCA may republish or correct specific positions if firms notifying positions have made amendments to their notifications.
(4) Powers in exceptional circumstances: To deal with immediate threats in the financial market, the Draft SI grants powers to the FCA to prohibit entirely or impose conditions on short sale activities. It thereby requires the regulator to carefully assess that interventions are justified and their impact on financial markets to avoid undue harm. In this context, the Draft SI also mandates the FCA to issue a statement of policy that provides additional insights into how the regulator plans to employ its powers to intervene in exceptional situations. This step was taken in response to feedback received by the HM Treasury during the Call for Evidence on the Short Selling Regulation (SSR) (please also see EventID 24019 in this context). The aim is to offer greater clarity regarding the FCA’s utilization of emergency powers related to short selling. This policy statement should outline the specific circumstances under which the FCA may intervene, the mechanisms it will employ, and the considerations guiding its actions in such exceptional circumstances.
(5) Setting of net short position notification threshold: The Draft SI finally sets the original notification threshold for the reporting of net short positions at 0.2% of an issuer’s total share capital. Any changes to this threshold must be made via a corresponding Statutory Instrument.
—
Concurrent to the Draft SI, the HM Treasury has also published a corresponding Policy Note which may be viewed as sort of a „guidance“ as it provides a set of frequently asked questions and answers (FAQs) in relation to the new Draft SI to address the most relevant issues that may arise from the new regulations. Some of the key FAQs are quoted below; for more detailed, comprehensive information, please refer to the enclosed document.
– What did any law do before the changes to be made by this instrument?
– What does the policy instrument do?
– What will change in comparison to the previous retained EU law (REUL) provisions?
– What will not change in comparison to the previous REUL provisions?
– What are the firm facing impacts going to be?
—
Comments on the Draft Regulations may be submitted to the Treasury up to January 10, 2024.