UK government proposes changes to short selling rules
12 July 2023 UK
Image: AdobeStock/William
The UK government has proposed changes to its rules governing short selling activity, which will potentially remove, or substantially revise, existing requirements relating to short positions in sovereign debt securities or sovereign credit default swap (CDS) contracts.
This announcement comes as part of a package of regulatory changes, collectively marketed by the UK government as the 鈥淓dinburgh Reforms鈥�, which were announced on 9 December 2022 and designed to exploit the UK鈥檚 exit from the European Union to apply its own UK-tailored financial services legislation.
As part of this review, HM Treasury (HMT) has issued a call for evidence on the Short Selling Regulation (SSR), a regulatory package that was introduced by the EU and brought onto UK statute following its exit from the EU.
Subsequent to this call for evidence, HMT has now launched an additional public consultation around its proposal to abolish elements of the short selling rules relating to government debt and CDS, provisions that were not included in the initial call for evidence, as part of its plans to replace the SSR with a 鈥淯K tailored鈥� regulatory regime.
In advancing these proposals, the UK government states that these provisions relating to sovereign debt and sovereign CDS are 鈥渁n unnecessary part of the regulatory regime that does not achieve its policy objective that we have inherited from the EU鈥�.
It says that it raised concerns about these elements of the SSR when this regulation was being negotiated in the EU on the grounds that this could have a negative impact on liquidity in UK sovereign debt markets.
It explains: 鈥淏ased on evidence gathered to date, including engagement with the relevant regulatory authorities, the government proposes to entirely do away with the requirements placed on investors when taking out short positions in sovereign debt or sovereign CDS, and the related reporting requirements.鈥� (parg 1.3)
In practice, these amendments will mean that the UK short selling regime will focus on short positions in equity securities, with sovereign debt and CDS continuing to fall under the Financial Conduct Authority鈥檚 emergency powers, dictating that the regulator can apply emergency short selling provisions under 鈥渆xceptional circumstances鈥� (parg 1.5).
In providing more detail, the UK government states that while it recognises a clear purpose in maintaining short-sale cover requirements for short positions in equities, 鈥渋t is not necessarily the case鈥� that the same requirements should apply to sovereign debt markets.
鈥淲hile it is conceivable that in extreme circumstances, without covering requirements, short selling of shares in an individual issuer could exceed share availability, the government considers this risk to be almost non-existent in sovereign debt markets, given the size and liquidity of the market. It reports that, on 31 March 2022, the size of the UK gilt market was roughly 拢2.4 trillion larger than the market cap of all the FTSE 100 and FTSE 250 companies combined (parg 2.8).
The UK government also indicates that it does believe that the short-sale disclosure regime under SSR is working.
While the FCA receives approximately 3250 reports per month relating to equity short positions, the current reporting threshold for sovereign debt dictates that firms are 鈥渦nlikely to take a short position big enough to be reportable鈥�, the UK government claims.
鈥淚n practice, the FCA has received very few net short position reports on sovereign debt since the regime has been in place,鈥� it adds. 鈥淔irms are required to implement extensive requirements on how to calculate a net short position in sovereign debt when the likelihood or usefulness of [this] reporting is very low in practice鈥� (parg 2.9).
It notes that the regulatory authorities already receive detailed reporting on sovereign debt and CDS positions via reporting requirements under the Markets in Financial Instruments Regulation (MiFIR), the European Market Infrastructure Regulation (EMIR), the 网爆吃瓜 Financing Transactions Regulation (SFTR) and through sterling money markets data.
HMT has out for public consultation and has requested that interested stakeholders should return their feedback within four weeks.
These proposed changes will build on earlier provisions in the Edinburgh Reforms package which will increase the disclosure threshold for net short position reporting from 0.1 per cent to 0.2 per cent of issued share capital.
This will also replace the current public disclosure rules based on individual net short positions with a disclosure regime based on aggregated net short position.
This announcement comes as part of a package of regulatory changes, collectively marketed by the UK government as the 鈥淓dinburgh Reforms鈥�, which were announced on 9 December 2022 and designed to exploit the UK鈥檚 exit from the European Union to apply its own UK-tailored financial services legislation.
As part of this review, HM Treasury (HMT) has issued a call for evidence on the Short Selling Regulation (SSR), a regulatory package that was introduced by the EU and brought onto UK statute following its exit from the EU.
Subsequent to this call for evidence, HMT has now launched an additional public consultation around its proposal to abolish elements of the short selling rules relating to government debt and CDS, provisions that were not included in the initial call for evidence, as part of its plans to replace the SSR with a 鈥淯K tailored鈥� regulatory regime.
In advancing these proposals, the UK government states that these provisions relating to sovereign debt and sovereign CDS are 鈥渁n unnecessary part of the regulatory regime that does not achieve its policy objective that we have inherited from the EU鈥�.
It says that it raised concerns about these elements of the SSR when this regulation was being negotiated in the EU on the grounds that this could have a negative impact on liquidity in UK sovereign debt markets.
It explains: 鈥淏ased on evidence gathered to date, including engagement with the relevant regulatory authorities, the government proposes to entirely do away with the requirements placed on investors when taking out short positions in sovereign debt or sovereign CDS, and the related reporting requirements.鈥� (parg 1.3)
In practice, these amendments will mean that the UK short selling regime will focus on short positions in equity securities, with sovereign debt and CDS continuing to fall under the Financial Conduct Authority鈥檚 emergency powers, dictating that the regulator can apply emergency short selling provisions under 鈥渆xceptional circumstances鈥� (parg 1.5).
In providing more detail, the UK government states that while it recognises a clear purpose in maintaining short-sale cover requirements for short positions in equities, 鈥渋t is not necessarily the case鈥� that the same requirements should apply to sovereign debt markets.
鈥淲hile it is conceivable that in extreme circumstances, without covering requirements, short selling of shares in an individual issuer could exceed share availability, the government considers this risk to be almost non-existent in sovereign debt markets, given the size and liquidity of the market. It reports that, on 31 March 2022, the size of the UK gilt market was roughly 拢2.4 trillion larger than the market cap of all the FTSE 100 and FTSE 250 companies combined (parg 2.8).
The UK government also indicates that it does believe that the short-sale disclosure regime under SSR is working.
While the FCA receives approximately 3250 reports per month relating to equity short positions, the current reporting threshold for sovereign debt dictates that firms are 鈥渦nlikely to take a short position big enough to be reportable鈥�, the UK government claims.
鈥淚n practice, the FCA has received very few net short position reports on sovereign debt since the regime has been in place,鈥� it adds. 鈥淔irms are required to implement extensive requirements on how to calculate a net short position in sovereign debt when the likelihood or usefulness of [this] reporting is very low in practice鈥� (parg 2.9).
It notes that the regulatory authorities already receive detailed reporting on sovereign debt and CDS positions via reporting requirements under the Markets in Financial Instruments Regulation (MiFIR), the European Market Infrastructure Regulation (EMIR), the 网爆吃瓜 Financing Transactions Regulation (SFTR) and through sterling money markets data.
HMT has out for public consultation and has requested that interested stakeholders should return their feedback within four weeks.
These proposed changes will build on earlier provisions in the Edinburgh Reforms package which will increase the disclosure threshold for net short position reporting from 0.1 per cent to 0.2 per cent of issued share capital.
This will also replace the current public disclosure rules based on individual net short positions with a disclosure regime based on aggregated net short position.
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