The new short selling regime that will apply from 1 November 2012

The UK introduced a temporary short selling regime in 2008, placing it on a permanent footing in 2009 and 2010 through rules now contained in Chapter 2 of the FINMAR module of the FSA Handbook. That regime requires the public disclosure of net short positions of 0.25% or above of the issued equity of selected UK financial stocks and UK stocks undertaking rights issues.

The UK regime will be abolished on 1 November 2012 when the EU Short Selling Regulation (EU No 236/2012) comes into effect. The Regulation is directly applicable in the UK and requires no further domestic implementation. The Regulation requires that:

• net short positions of 0.5% or above in shares have to be publicly disclosed; and
• net short positions in shares of 0.2% and above need to be notified to the relevant competent authority (in the UK, that is the Financial Services Authority).

The scope of the Regulation – which applies both to shares (and not being limited to financial or rights issue-affected shares) and to sovereign debt – is summarised in this Slaughter and May note.

The FSA last week published issue 42 of its “Market Watch” newsletter which, ahead of the 1 November 2012 implementation date, it described as a “Special Short Selling Edition”. This edition of Market Watch:

• confirms that the domestic short position disclosure regime will be abolished;
• sets out the FSA’s approach to using the temporary suspension powers that it, as the UK competent authority, is given by the Regulation and which enable the FSA to intervene following a significant intra-day price fall of a financial instrument and impose a temporary prohibition or restriction on short selling (the FSA will consult on developing a consistent framework for possible exercise of this power);
• confirms that the public disclosures of net short positions of 0.5% or above will be made via its website (and from 1 November public disclosures of short positions will no longer be required via a RIS):
• discusses the market maker and authorised primary dealer exemptions contained in the Regulation; and
• states that, as ESMA will be compiling a set of frequently asked questions about the Regulation, the FSA will not do so.

For a discussion of the possible unintended consequences of the Regulation, see this article by Paul Murphy in the Financial Times.

See also: ESMA publishes Q&As on the new short selling regime

Short selling and CDS regulation adopted, will apply from 1 November 2012

Short selling: European Commission adopts delegated act and regulatory technical standards

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