UK and US short selling regimes – a short note on the changes.

The FCA recently amended their short selling webpage with numerous updates related to the UK short selling regime.

As you may recall – and as we referenced in a communication back in July – the Treasury had previously proposed significant changes to the UK short selling regime, and we now have  more clarity – if not absolute certainty – as to how those proposals are being implemented.

Notification Threshold

The first change will see, from 5^th February 2024, an increase in the FCA notification threshold for the reporting of net short positions from 0.1% to 0.2%, reverting to the pre-Covid reporting threshold.

In scope issuers and Notification

Second, a broader (draft) statutory instrument – the Short Selling Regulations 2024 – has been published alongside an explanatory policy note. This draft statutory instrument (“SI”) seeks to replace retained EU law. In practical terms, this means the following:

• The FCA will be required to publish a ‘positive’ list of shares in scope of the regime – a positive move forward from the current exempt list;
• The FCA will be given powers to impose certain specific conditions on short selling, such as restricting uncovered short selling and requiring borrow and locate arrangements;
• The FCA will be required to publish the aggregate net short positions they receive by issuer, dispensing with the 0.5% public disclosure regime – individual investment management firms will not be identified as they are in the current publication.

 

The explanatory policy note provides that the policy approach of the draft SI is final, but comments on the drafting and technical aspects are welcome until 10^th January 2024.

To complete the crop of UK short selling developments, the Treasury also published its response to the consultation regarding the short selling of UK sovereign debt and use of credit default swaps (‘CDS’). The response sets out the Treasury’s final position in respect of the sovereign short selling regime and, of most interest, confirms that reporting requirements when entering short positions in UK sovereign debt or related sovereign CDS will be removed.

US Short Selling – the long and short of it

Those of our clients who are active in the US markets have no doubt seen that the SEC – in October – adopted a rule to increase transparency into short selling activity.

The new rule requires, for the first time, institutional investment managers (as defined) that meet or exceed certain prescribed reporting thresholds to report on Form SHO short position and short activity data for equity securities. In a similar way that the FCA will from next year, the SEC will aggregate and publish data collected from Form SHO (the expectation is that data will be published within one month after the end of the reporting calendar month).

Form SHO will be filed via EDGAR within fourteen calendar days after the end of each calendar month and will need to be reported when the following criteria are satisfied:

• For each relevant equity security that is a Reporting Company Issuer, over which the investment manager and all accounts over which the institutional investment manager has investment discretion, the monthly average gross short position meets or exceeds either:
  1. A monthly average gross short position at the close of regular trading hours in the equity security with a value of USD $10m or more; or
  2. A monthly average gross short position at the close of regular trading hours as a percentage of the issuer’s total shares outstanding of 2.5% or more.
• For each equity security that is of a class of securities of an issuer that is not a Reporting Company Issuer over which the institutional investment manager and all accounts over which the institutional investment manager has investment discretion, the gross short position meets or exceeds a USD value of $500,000 or more at the close of regular trading on any settlement date during the calendar month.

 

It is noteworthy that the calculation for non-Reporting Company Issuers (item 2 in the list above) is different to Reporting Company Issuers, in that the calculation for non-Reporting Company Issuers is not determined based on the monthly average gross short position but will be triggered if exceeded on any settlement date during the reporting month.

The information to be reported on Form SHO comprises:

• The end-of-month gross short position in the equity security at the close of regular trading hours on the last settlement date of the calendar month; and
• For each individual settlement date during the calendar month, the net activity in the reported equity security, which includes activity in derivatives.

 

The new rule will become effective 60 days following the date of publication in the Federal Register, with the compliance date being 12 months after the effective date of the adopting release.

Finally, and as always – a reminder that short selling regimes differ from country to country so to the extent that you have short positions outside of the UK (or the US), you will need to continue to monitor and adhere to the short selling rules in the applicable jurisdictions.

 

December 2023