HM Treasury Shakes Up the Future of Short Selling in the UK

On 11 July 2023, HM Treasury issued two publications on the future of the UK’s short-selling regime. The first publication was the UK government’s response to HM Treasury’s December 2022 call for evidence on the Short Selling Regulation (SSR), while the other is a new follow-on consultation relating to the short selling of sovereign debt and sovereign credit default swaps (CDS).

Following Brexit, one of the UK government’s goals for financial services regulation in the UK is the repeal and replacement of EU-derived legislation. This includes the SSR, which was onshored in the UK upon the UK’s departure from the EU. Once the SSR is repealed under the newly enacted Financial Services and Markets Act 2023, it will be replaced with rules made directly by the Financial Conduct Authority (FCA). The original SSR call for evidence sought views on what such new rules should look like, including how much they should diverge from the original SSR.

In its response to the call for evidence, HM Treasury has confirmed two main points:

• The current public disclosure regime based on individual net short positions over a 0.5% threshold of the issued share capital of an in-scope issuer (i.e., a UK-listed company) will be replaced with an aggregated net short position disclosure regime. This means only the total aggregated net short positions in a UK issuer will be published, not the positions of individual short sellers.
• The current threshold for net short position reporting to the FCA will increase from 0.1% back to 0.2%. This was the threshold when the SSR was originally implemented, but it was lowered to 0.1% following market turmoil relating to the Covid-19 pandemic.

HM Treasury also stated that the FCA would consider whether to replace the current ‘negative’ list of shares primarily traded on overseas exchanges, and therefore not subject to the SSR, with a ‘positive’ list of in-scope shares.

In relation to the consultation on UK sovereign debt (e.g., gilts) and UK sovereign CDS, HM Treasury has proposed removing the short-selling restrictions and requirements relating to such instruments entirely, including the restrictions on uncovered short positions and reporting requirements. The FCA will, however, retain emergency intervention powers in relation to such instruments, including the ability to ban short-selling.

In terms of next steps, the FCA will need to consult on the changes proposed in the response to the call for evidence. It could therefore be some time before the proposals are enacted.

The response to the call for evidence and the consultation on sovereign debt and sovereign CDS are available here and here, respectively.