Primary Market Bulletin 47

Following the Treasury’s Short Selling Regulation Review: Call for Evidence and its Response the Government has published a draft statutory instrument (SI) alongside an explanatory policy note. This draft SI and the policy note set out how the Government currently intends to change the regulatory regime for short selling in the UK, but do not set out all of the elements of this new proposed regime. 

In broad terms, the draft SI sets out the scope of the proposed new UK short selling regime and provides the FCA with a range of related rulemaking powers to specify firm-facing short selling requirements in the FCA handbook. It also includes emergency intervention powers for the FCA to require additional short selling-related information and to restrict short selling in exceptional circumstances where there is a serious threat to financial stability or market confidence, or to prevent a disorderly decline in the price of a financial instrument.

Among the key elements set out for the new proposed regime, we note the following:

• Short selling in shares and related instruments is defined as a new designated activity.
• The FCA will have the power to exempt shares from requirements and is required to publish a list of shares to which certain of the new short selling rules apply.
• The FCA will be required to publish the net short positions received from short sellers on an aggregated basis by issuer.
• The FCA will have the power to make rules to exempt market making activities and stabilisations from certain short selling requirements.

The use of these new powers to make rules on short selling by the FCA will be subject to FCA consultation.

The Call for Evidence was part of the Government's wider programme to repeal and replace retained EU law in financial services. The Government asked for comments on the draft SI by 10 January 2024. We understand that the Treasury currently plans to lay the final version of the statutory instrument before Parliament in 2024.

Following July 2023’s Short Selling Regulation: Consultation – sovereign debt and credit default swaps, the Treasury has published its response. This document summarises consultation responses received and sets out the Government’s current proposed approach for the new UK regime.

The key proposals made by the Government are:

• to remove requirements currently placed on investors when taking out short positions in sovereign debt or sovereign CDS, and the related reporting requirements
• to retain sovereign debt and CDS in scope of the FCA’s emergency intervention powers for short selling, which will be treated the same as other financial instruments 

As part of the Government’s proposal for the FCA to retain its emergency intervention powers on short selling, the Government will require the FCA to set out its approach to using these powers. We will consult on this approach in due course.

The Government has introduced the Short Selling (Notification Threshold) Regulations 2023 (SI 2023/1258). This SI increases the notification threshold for the reporting of net short positions in shares to the FCA from 0.1% to 0.2% of total issued share capital of an issuer. These Regulations will come into force on 5 February 2024. The Treasury has also published an accompanying Explanatory Note for the SI.

The FCA has been working on the implementation of this higher reporting threshold and will be ready to receive notifications at the 0.2% threshold from Monday 5 February 2024 via our Electronic Submission System (ESS portal). 

We have also requested all reporting firms to make the necessary changes to their systems and internal processes to allow them to submit notifications at the higher threshold via our ESS portal ahead of the 5 February.

Until the threshold change is implemented on 5 February 2024, firms are required to continue to report positions which are at or above 0.1% and below 0.2%. For those positions, no closing reports will be required from 5 February 2024.

For open positions at 0.2% and above reached before, on, or after 5 February 2024, closing reports will be required as usual when the position falls below 0.2%.

If you have questions in relation to the implementation of the 0.2% reporting threshold, please send us an email to [email protected] with the subject ‘Net short position threshold change’. 

In November 2023, the FCA published the Credit Rating Agency UK Market Share Report for 2022 (the Report).

The report reveals continued concentration of market share (90%) amongst 3 global CRAs: S&P Global Ratings, Moody’s Investors Service and Fitch Ratings. Those UK registered CRAs with less than 10% market share have seen a slight rise in their aggregate market share, increasing to 10% compared to 8% in 2021. This shift underscores a dynamic landscape but does not diminish the overall high concentration in the UK CRA market.

The report serves as a reminder to issuers of their regulatory obligation under Article 8d (1) of the UK CRA Regulation to consider appointing at least one CRA with no more than 10% of total market share when they intend to appoint at least 2 CRAs for the credit rating of the same issuance or entity. Where the issuer does not appoint at least one CRA with no more than 10% total market share, it is required to document what was considered and the decision. The obligation to consider may include (but is not limited to) engaging with a smaller CRA on the product offering, ratings methodology and/or fee model.

As part of our supervision of the UK CRA Regulation, we may engage with issuers or related third parties, such as advisors and arrangers, to understand the nature of their consideration of a CRA with less than 10% total market share and how the selection decision is evidenced. Issuers are responsible for ensuring that they understand the UK CRA Regulation and complying with it.