What is short selling? 

Short selling is an investment activity in which investors borrow securities with the intent to sell them, hoping to repurchase them at a lower price in the future. In other words, short selling involves establishing a risk position with the expectation that the securities will decline in price. In doing so, short sellers play a fundamental role in market stability. Short selling enables the market to find an equilibrium price reflecting the differing views from market participants and is also an important tool in the provision of liquidity from market makers. This supports liquidity and risk management. Ensuring a well-functioning short selling regime is vital to the health of the UK’s financial markets. 

The UK’s short selling regime reform 

Since the initial proposals to repeal EU legislation, the government has championed its objective to strengthen and promote the UK’s capital markets competitiveness as an evolution, not a revolution. The goal is that of tailoring legislation to the needs and characteristics of the UK market, thereby preserving the parts of EU legislation which work well. As the saying goes, there’s no point in changing things for change’s sake. That is exactly the case here.  The short selling regulation is robust and effective, but it could benefit from a few small technical adjustments which would result in efficiency gains.  

The UK Finance response 

We were pleased to respond to HM Treasury’s recent Short Selling Regulation Call for Evidence.  Firstly, it represented an opportunity for short selling to continue playing a vital role under a regime that ensures adequate regulators’ oversight. Secondly, because it showcased how EU legislation doesn’t always have to be repealed, but that in some circumstances, all that is needed is a set of well calibrated adjustments.  In our response, we highlighted that the current short selling regulation already functions well, and requires no fundamental change, only a set of targeted technical adjustments. These would improve the short selling regime and contribute to the objective of making UK capital markets more efficient and competitive. Our recommendations include:  

• The Financial Conduct Authority (FCA) should simplify the market maker exemption, for example by making it activity-based rather than an instrument-based and by allowing firms to benefit from it immediately, and not following a 30-day notification period. This would reduce operational complexities and increase efficiency. 

• The FCA should provide a positive securities list clarifying the securities eligible for the market maker exemption, streamlining firms’ operations.  

• The FCA should have greater intervention powers to prohibit or restrict short selling when the price of various instruments admitted to trading on a UK venue are too volatile, so long as these powers are used judiciously, to preserve healthy financial markets. 

• Investors’ public disclosure requirements to notify the FCA when their short position in shares traded on a UK venue exceeds an agreed threshold should be established and then the threshold maintained at a consistent level. This would reduce operational inefficiencies and reduce compliance costs for firms. 

We are at a crucial junction in tailoring regulation to ensure the UK maintains its position as a leading global financial centre. Our response to the call for evidence on the short selling regulation demonstrates that sometimes all that is needed is to build upon current regulation and fine tune it, rather than re-writing the whole rulebook. Sometimes successful regulation is just a couple of amendments away. 

• Our response to the Short Selling Call for Evidence can be found here.  

• A summary of the UK Finance position and further background materials can be found here.