The regulatory regime for short selling in the UK: a long time coming

On 11 November 2024, an updated draft of the Short Selling Regulations 2024 was laid before Parliament, accompanied by a draft explanatory memorandum. The Regulations are intended to establish a new regulatory framework to replace the UK Short Selling Regulation, which was based on Regulation (EU) 236/2012 and incorporated into UK law by the European Union (Withdrawal Act) 2018 following the UK’s departure from the EU. 

The new regime has been a long time coming. The UK Short Selling Regulation was on the list of assimilated EU law that was earmarked for revocation by the Financial Services and Markets Act 2023. The previous government published a call for evidence in December 2022 as part of its Edinburgh Reforms, seeking views on what the new UK regime should look like. In July 2023, the government published its response to the call for evidence setting out its intended approach for the short selling of shares. Simultaneously, the government published a consultation on the regulation of sovereign debt and credit default swaps under the short selling regime. 

In November 2023, the government published its response to the consultation on sovereign debt and credit default swaps, along with a first draft of the Short Selling Regulations 2024 and a policy note. For more information on the proposed new regime as set out in those documents, see our blog post from November 2023.

HM Treasury explained at that time that while the policy approach on the new regime was settled, some drafting and technical aspects of the Regulations were still subject to change, and stakeholders were invited to provide technical comments on the draft statutory instrument by January 2024. 

What will change under the new regime?

Under the draft Regulations, short selling is defined as a “designated activity,” which means that the FCA can be given rulemaking, supervisory and enforcement powers with respect to that activity, without requiring all firms in scope of the activity to seek FCA authorisation (though firms engaging in short selling and carrying on a regulated activity will still need to be authorised by the FCA).

The updated draft Regulations make some substantive changes to the regulatory regime for short selling, consistent with the earlier draft published in November 2023. In summary:

• The draft Regulations introduce a requirement for the FCA to publish anonymised aggregated net short positions based on all individual position notifications it receives, whereas the current regime requires firms to publish individual net short positions above 0.5% of issued share capital.
• The draft Regulations also remove restrictions on uncovered short selling of sovereign debt and sovereign credit default swaps as well as sovereign debt notification requirements, though emergency intervention powers are retained in the same way as for other financial instruments.

The Regulations also make a number of changes in order to establish a new framework for regulating short selling in which detailed firm-facing requirements will be set by the FCA. For example, under the current regime, shares that are admitted to trading on a UK trading venue but mostly traded outside the UK are exempted from some requirements, and the FCA publishes a list of shares that it considers to be exempt. Going forward, it will be up to the FCA to decide which shares should be exempted from its requirements, and the FCA will instead publish a list of the shares that are subject to its rules. 

Similarly, whereas the current regime contains a market maker exemption, the Regulations give the FCA the power to exempt market making activities and stabilisation activity from short selling-related requirements. The Regulations create a framework for HM Treasury to designate non-UK jurisdictions as equivalent for the purposes of any market maker exemption, which means that market makers that are members of a UK trading venue or a trading venue in an overseas jurisdiction that has been designated as equivalent may be able to benefit from an FCA exemption. EEA states will continue to be deemed equivalent for these purposes.     

The FCA will retain its existing powers to intervene in exceptional circumstances, such as the ability to request information and prohibit short sales or impose conditions. However, it will be required to publish a statement of policy on how it plans to use these powers.

The Regulations will also replicate the requirement under the existing Short Selling Regulation for UK CCPs to ‘buy-in’ shares where a seller is unable to deliver the shares within four working days of the original settlement date.

The Short Selling Regulations 2024 and the draft Financial Services and Markets Act 2000 (Designated Activities) (Supervision and Enforcement) Regulations 2024, which were laid at the same time, extend the FCA’s existing supervision and enforcement powers under FSMA 2000 so they can be used in relation to designated activities such as short selling. This means that the FCA will be able to supervise short selling by gathering information and launching investigations into persons carrying out that designated activity, as it does for regulated activities. The FCA will also be able to enforce its short selling rules by publicly censuring or imposing financial penalties on persons that breach them.

The long view

While the Short Selling Regulations 2024 set out the framework for the new short selling regime in the UK, much of the detail still needs to be fleshed out in rules to be made by the FCA, including what shares will be subject to the new regime and what exemptions will apply. The legislation will commence at the same time as the FCA makes these new rules, alongside the repeal of the UK Short Selling Regulation and other related legislation.

In the November 2023 policy note, the FCA said it was working closely with the government to support the development of the new legislative framework and that it would set out its detailed approach for how it will use its new rulemaking powers. It said it would consult market participants and take into account the feedback to the government’s 2022 call for evidence. The FCA had indicated that it would start the consultation process in 2024, but it is not yet clear when that will happen. In the meantime, the long wait for a new short selling regime in the UK goes on.