Government confirms relaxations of UK Short Selling Regulation regime for shares; signals intent to abolish regime for UK sovereign debt and CDS

Following Jeremy Hunt's Mansion House speech, HM Treasury has published a response to its call for evidence on the Short Selling Regulation review as well as a consultation paper on the regime for short selling of sovereign debt and uncovered sovereign credit default swaps.

Response to Call for Evidence relating to shares

The Government has come out strongly in favour of short selling as a feature of efficient markets, promising several relaxations to the existing UK Short Selling Regulation (UK SSR) framework for shares while retaining the FCA's powers to intervene in emergency situations.

In terms of key confirmed changes, the Government has committed to:

• raise the threshold for privately notifying the FCA of net short positions back up to 0.2%, up from the current 0.1% level that was introduced in response to Covid; and
• remove individual public disclosure of net short positions above 0.5%, and instead introducing an aggregated net short position disclosure on the relevant stock.

The Call for Evidence saw a large number of responses, including more than 800 from retail investors (though HM Treasury notes they were perhaps more concerned with the US regime). It seems the Government was swayed by industry advocacy regarding the operational burden associated with the increase in net short position reports resulting from the 0.1% threshold, as well as the distortive effect of going above a 0.5% net short position triggering public disclosure.

The Government also confirms that it will empower the FCA to make rules concerning a number of other issues raised in the Call for Evidence, including:

• on operational arrangements for reporting net short positions to the FCA, including potentially moving the current 15:30 next trading day deadline and considering greater automation of reporting arrangements;
• streamlining the process for applying for the market maker exemption, including considering whether the current 30-day prior notification requirement remains appropriate; and
• considering changes to make identifying the shares that in scope of the regime easier, for example by the FCA maintaining a 'positive list' of in-scope shares.

The FCA will retain its intervention powers to suspend short selling in market emergencies, with the FCA expected to set out a paper consulting on its approach to using these powers (to date the FCA has not instituted any short selling bans) in due course.

Industry participants are likely to welcome the steps taken and signaled to move towards a regime which continues to subject short selling to regulatory oversight, but in a more proportionate fashion. 

Consultation paper on sovereign debt and uncovered sovereign CDS

The sovereign debt/CDS consultation paper is short, as the Government's proposal is simple: to remove entirely the current requirements imposed on investors when taking out net short positions in UK sovereign debt or UK sovereign CDS, and the related reporting requirements. Again, however, the FCA would retain power to intervene in exceptional circumstances.

The consultation paper is clear that the UK Government never supported the inclusion of these restrictions in the EU Short Selling Regulation and points to the absence of similar regimes in comparable non-EU jurisdictions (e.g. the US and Singapore), work done by the IMF and ESMA which found that these restrictions have negative impacts on liquidity, and the rarity of the net short position reporting requirement actually being triggered in practice (given that the threshold currently requires a net short position of about £118.6bn).

Next steps

Market participants have four weeks to respond to the sovereign debt consultation paper (which closes on 7 August 2023), while HMT's Plan for Delivery indicates that a statutory instrument bringing changes to the UK SSR into law should be published in draft before the end of 2023 with adoption most likely taking place in 2024. An FCA consultation paper on resulting changes to the FCA's rules should also be anticipated within this timeframe.

Given the significant relaxations proposed, market participants may also wonder whether the EU will follow suit shortly as well to avoid a competitive disadvantage emerging...