8/8/2019 Briefing Proposed Revisions to the UK's Short Selling Regime - 10022009

1/2

Ashurst London

February 2009

ABU DHABI BRUSSELS DUBAI FRANKFURT HONG KONG LONDON MADRID MILAN MUNICH NEW DELHI NEW YORK PARIS SINGAPORE STOCKHOLM TOKYO

Corporate briefing

Proposed revisions to the UK's short

selling regime

Following the expiry of the FSA's shortselling ban on 16 January, the FSA's

Discussion Paper 09/1 (DP 09), proposesthat net individual short positions of 0.5 per

cent or more in all listed stocks of UKincorporated issuers, not only those of

financial sector firms, should be disclosedpublicly to the market. A stricter regime forshort selling during rights issues will beretained.

The FSA's views on short selling

DP 09 does not propose any new restriction on short

selling. DP 09 confirms that the FSA views shortselling as "a legitimate investment technique in normal

market conditions", given that it can increase market

efficiency through leading to more accurate price

formation and enhance liquidity by increasing the

number of potential sellers in a market.

In light of this, the FSA does not currently favour any

permanent ban on short selling, including naked short

selling or the short selling of financial sector stocks. In

addition, the FSA is not in favour of a ban on short

selling of stocks of companies engaging in rights

issues, or by the underwriters of rights issues of the

shares they are underwriting for the duration of the

underwriting process. The FSA has also indicated that

it does not support alternative means of constraining

short selling, such as "circuit breakers" (which involve

a suspension of trading in a share whenever there is

an abnormal rise or fall in its price) or a "tick" rule

(which prevents short selling at successively lower

prices).

The FSA does, however, propose that it should still

have the power to ban short selling on an emergency

basis where necessary, though unhelpfully there is still

a lack of certainty from the FSA as to what these

powers should be the FSA is still "exploring what

legislative changes might be necessary to provide [it]

with long-term powers to make these emergency

interventions".

The FSA also identifies that in its view short selling can

lead to market abuse, disorderly markets,

transparency deficiencies and settlement problems.

The FSA's proposals

Public disclosure of significant net short

positions held in all types of stocks

To address these problems, the FSA proposes that:

individual net short positions held in all equitiesand their related instruments of UK incorporated

issuers should be publicly disclosed on reaching a

threshold of 0.5 per cent;

further increases or decreases of 0.1 per centabove or below this threshold should also be

publicly disclosed; and

net short positions falling below 0.5 per centshould also be publicly disclosed.

However, with respect to rights issues, the FSA

proposes that the initial disclosure threshold should

remain the same as it is now, i.e. 0.25 per cent.

However, as regards ongoing disclosure obligations,

the FSA considers that the same banded approach is

appropriate i.e. 0.1 per cent. Again, a final

disclosure would need to be made if the position fell

below the minimum 0.25 per cent threshold.

The FSA is not proposing any further measures to

regulate trading in credit default swaps.

Exemptions

The FSA proposes to retain the exemption for market

makers in its current short position disclosure regime.

The exemption would cover market makers only when,

in the particular circumstances of each transaction,

they are acting in that capacity. Consequently, the

FSA would not expect market makers to hold

significant short positions, other than for brief periods.Proprietary trading where a firm is acting more as an

investor or trader rather than a liquidity provider

would not fall within the scope of market making and

would not be exempt.

8/8/2019 Briefing Proposed Revisions to the UK's Short Selling Regime - 10022009

2/2