FCA Confirms Details of the UK’s Post-Brexit Short-Selling Regime

On 28 October 2020, the Financial Conduct Authority (FCA) published a webpage providing instructions to report net short positions in relevant UK shares and sovereign debt from 1 January 2021. This confirms how the on-shored regime for short selling will operate in the UK after the end of the Brexit transition period.

How does the UK regime work?

In essence, if you previously made notifications to the FCA in respect of net short positions under the EU Short Selling Regulation (“SSR”), you will be required to continue doing so under the Short Selling (Amendment) (EU Exit) Regulation 2018 (“UK SSR”). This applies to shares where the principal trading venue is located in the UK, together with UK sovereign debt and uncovered positions in UK sovereign credit default swaps.

Interestingly, the FCA has reverted to the 0.2% threshold for the initial level at which notification for net short positions in shares is required. This contrasts with the 0.1% threshold that has been in force under SSR across the EU (including the UK) since 16 March 2020 – unless further extended, this temporary measure will expire on 16 December 2020.

Other thresholds for notification and disclosure, including those applying to UK sovereign debt and credit default swaps, remain unchanged.

What instruments need to report?

Taking over the role previously carried out by European Securities and Market Authority (“ESMA”), the FCA will publish on its website from 1 January 2021 the list of instruments caught by the UK regime – the so-called Financial Instruments Reference Data System (FIRDS). Don’t forget this list may include some non-UK issuers whose shares happen to have their principal trading venue in the UK.

The FCA will also publish the list of UK shares which are exempt from the obligation to report (because their principal trading venue is outside the UK) plus ESMA’s list of exempted UK shares as of 31 December 2020 – this latter list remain exempt from UK reporting obligations for a further 2 years from 1 January 2021.

Does UK SSR still apply on a global basis?

Yes. Again, the scope of the UK regime applies without territorial restriction on the part of the entity required to report, as it always has under the EU regime.

A recent FCA enforcement case

This last point is underlined by a recent FCA decision notice against a Hong Kong-based manager who was fined some £873,000 for failure to disclosure a position in a UK issuer over an extended period. The FCA were unimpressed by the defendant’s assertion of a lack of understanding of the rules.

Another feature of the case is that the short position was largely built up through equity swap transactions – a reminder that all derivative instrument positions must be included in the calculation of net shorts for both shares and sovereign debt.

ACA Guidance

Firms should review their processes for identifying and reporting under both UK SSR and its EU counterpart, particularly taking into account any differences in reporting thresholds which may persist into 2021.

For further information on this alert, please speak to Martin Lovick or your usual ACA consultant at +44 (0)20 7042 0500.

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