Edinburgh reforms: Government signals openness to relaxing UK short selling regime

Among the measures in the "Edinburgh reforms" package, the Government has published a Call for Evidence (CfE) on reforms to the UK Short Selling Regulation (UK SSR).

Though not at the stage of detailed proposals, the CfE focuses on whether the current obligations associated with short selling of UK shares (including the restriction on uncovered short selling, the reporting of net short positions greater than 0.1% to the FCA and public disclosure of net short positions above 0.5%) bring sufficient benefits to the market to justify the regulatory burdens they impose. 

The Government appears convinced of the benefits that short selling can bring in terms of market liquidity and efficient price formation, so market participants wanting to see a simplification of the existing regime will likely find a sympathetic reception when responding to the CfE. On the other hand the CfE also recognises that change can prove disruptive, for example where existing IT systems need modification as a result (particularly if the UK will end up with greater divergence from the EU, which could present challenges for firms which operate on an EMEA-wide basis).

Key points

• Focus is on shares: The CfE states that the Government is currently focused on the regime for UK shares. It will consider the UK SSR's regime for short sales of UK sovereign debt and uncovered UK sovereign CDS at a later date.
• Appropriateness of uncovered short sale restrictions: The CfE asks whether current restrictions on uncovered short sales are appropriate. It invites comments on how effective borrowing and locate arrangements are at preventing settlement fails in practice.
• FCA reporting: With respect to reporting of net short positions to the FCA, views are sought on whether the current 0.1% threshold is appropriate or whether it should be higher (perhaps reverting to the previous 0.2% regime). More broadly, the CfE asks whether there is benefit to the FCA monitoring short selling activity at all.
• Public disclosure: On 0.5% public disclosures (and incremental 0.1% disclosures above that level) the CfE notes that while other regimes globally commonly do require disclosure of significant net short positions, a wide variety of thresholds are used and approaches vary on whether the identity of the short seller is disclosed. The CfE asks respondents for views on whether there should be a public disclosure obligation, whether the existing obligation imposes unnecessary barriers and whether the identities of short position holders should be disclosed.
• Market Maker Exemption ("MME"): The CfE asks whether the MME is functioning efficiently, with the Government specifically mentioning the obligation to notify the FCA 30 days in advance of reliance on the MME.
• FCA emergency intervention powers: Given that the FCA has never exercised its UK SSR short selling ban powers, and has publicly stated that it would set a high bar on imposing any bans, the CfE explores whether these powers are necessary taking into account other FCA powers to, for example, suspend trading.
• Exemption for overseas shares: Currently, shares traded on UK regulated markets or MTFs but for which the primary exchange is overseas benefit from an exemption but must appear on an FCA list of exempted third country shares. The Government asks whether this could be done more efficiently, for example by the FCA maintaining a "positive list" of shares that are covered.

The CfE closes on 5 March 2023.