The U.K.’s new lighter-touch short selling regime

There are significant changes being made to the scope and approach. Technical changes will also be made in various areas. This is noteworthy in that the new Labour government has not paused these proposals to pursue closer alignment with the EU, but instead taken forwards the "lighter-touch" regime proposed under the previous government. 

In the U.K., short selling is currently regulated under the Short Selling Regulation (“U.K. SSR”), which is the assimilated version of the EU Short Selling Regulation (“EU SSR”) (Regulation (EU) No 236/2012). The changes made by the SSR 2025 are intended to make the U.K. financial markets more competitive and agile post-Brexit. There will now be meaningful divergences between the revised U.K. regime and the U.K. SSR and the EU SSR. The main differences are as follows:

• The U.K. is replacing the current requirement to publicly disclose all short positions over 0.5% with a new disclosure structure, whereby the Financial Conduct Authority (“FCA”) will receive reports privately and publish aggregated short positions in each company's shares. This removes the need to reveal the identity of individual short-holders.
• The U.K. is delegating responsibility to the FCA for making rules requiring notification of net short positions. The U.K. SSR requires notification to the FCA of net short positions of 0.2% and each 0.1% increment above that. The threshold remains at 0.2% in the SSR 2025. However, instead of the notification requirement being provided for in legislation, the FCA is empowered to make rules requiring the notification of net short positions equal to or greater than the threshold. The EU SSR requires short position holders to report at 0.1% of the issued share capital and each 0.1% increment above that. 
• The U.K. is removing from scope sovereign debt and sovereign CDS. There will be no reporting requirements at all for these instruments under the SSR 2025¹, and no restrictions on uncovered short sales of sovereign debt and sovereign CDS, unless provided for under the FCA’s rules made in exceptional circumstances. The EU SSR, by contrast, requires reporting of short sales in EU member state sovereign debt, and imposes cover requirements for short sales of sovereign debt and EU sovereign CDS, banning naked short sales of such instruments. 
• The U.K. is delegating responsibility to the FCA for making rules requiring notification of net short positions. The U.K. SSR requires notification to the FCA of net short positions of 0.2% and each 0.1% increment above that. The threshold remains at 0.2% in the SSR 2025. However, instead of the notification requirement being provided for in legislation, the FCA is empowered to make rules requiring the notification of net short positions equal to or greater than the threshold. The EU SSR requires short position holders to report at 0.1% of the issued share capital and each 0.1% increment above that. 
• The EU SSR exempts market making activities from certain of the notification, reporting and cover requirements where those activities are carried out by certain entities that are a member of an EU regulated market or multilateral trading venue or an equivalent third-country market. The EU has not made any equivalence decisions under the EU SSR. The U.K. is replacing the EU equivalence regime for trading venues with a new “designation regime”, which we discuss below. Upon Brexit, the U.K. made an equivalence decision for the EEA states, which will stand under the new designation regime. This is relevant for the market maker exemption because the FCA may only make rules exempting market making activities for banks, investment firms or overseas entities that are members of a U.K. trading venue or a trading venue in a jurisdiction that has been designated under the SSR 2025.
• The U.K. is moving certain provisions from primary or secondary legislation to the FCA’s rulebook and empowering the FCA to make rules. This is consistent with the general “push down” of EU legislative provisions to the U.K. regulator rulebooks in post-Brexit U.K. 

The SSR 2025 will replace the existing U.K. SSR and move some of the directly applicable requirements to the FCA’s rulebook. The FCA is due to consult on its proposed detailed rules, which will provide further clarity on the obligations applicable under the new U.K. short selling regime. At this stage, only certain provisions have entered into force, mostly those granting the FCA powers to make rules. More detail on timing is set out below. The entire revised U.K. regime is expected to come into force at some point during 2025. Until the new regime is fully applicable, firms should continue with their normal short position calculations and filings. Firms should start to consider how to implement the main changes arising from the U.K.’s revised short selling regime, and look out for the FCA’s proposed rules. We discuss below the key changes to the U.K. short selling regime as made by the SSR 2025. 

Publication of aggregate net short positions

In a major change, only anonymised, aggregate net short positions will now be published by the FCA. This is a departure from the current U.K. SSR and EU law, under which parties holding short positions over 0.5% (and every 0.1% above that in the EU and every 0.2% above that in the U.K.) must be named publicly, alongside details of their transactions. The U.K.’s new approach is similar to the U.S. Securities and Exchange Commission’s new rule and new Form SHO, which requires certain institutional investment managers to report specified short position data and short activity data for equity securities. Those subject to the rule are required to file monthly reports with the SEC and the SEC will aggregate the data and publicly disseminate the aggregated data. This rule is currently undergoing challenge in the U.S. federal court in the Fifth Circuit.

Under the new U.K. short selling regime, for each working day, the FCA will publish the aggregate net short position for the issued share capital of a company that has admitted shares on U.K. markets. This is a welcome change, particularly for asset managers who for years have been concerned about copycat behaviour, short squeezes and potentially revealing trading strategies. The changes are intended to encourage more trading activity and greater liquidity in U.K. markets.

Designated Activities

Short selling is one of the activities falling into the U.K.’s new "designated activities" regime (“DAR”). The DAR gives U.K. regulators powers over market participants engaging in particular activities, including persons who may not be regulated financial institutions.  This is relevant to short selling disclosure and conduct rules, which may apply to any person, including traders, unregulated corporates and funds, trading on U.K. venues without the need for them to seek authorisation from the FCA. Using its powers established by the DAR regime, HM Treasury has set certain requirements in the SSR 2025 directly and provided for certain areas to be covered by the FCA’s rules. 

1. Entering into a short sale² of an admitted share.
2. Entering into any transaction other than a short sale of an admitted share, where an effect of the transaction is to confer a financial advantage on the person entering into that transaction in the event of a decrease in the price or value of an admitted share.

This designation entered into force on January 14, 2025. The scope of shares and related instruments covered by the SSR 2025 is broader than that under the existing U.K. SSR. The legislation captures short transactions in all shares which are admitted to trading on a U.K. trading venue (i.e., a U.K. exchange or U.K. MTF), including transactions in such shares occurring outside a U.K. venue. This differs from the existing U.K. SSR, which provides exemptions for shares admitted to a U.K. trading venue that are principally traded on a venue outside the U.K. However, the FCA will be empowered to exempt certain shares from the rules under the incoming regime so firms should keep an eye out for the FCA’s proposals. 

The short selling regime for sovereign debt and sovereign CDS will no longer apply to U.K. government-issued instruments, once the U.K. SSR is revoked. Typically sovereign CDS hedging activity takes place to hedge business and infrastructure risk in a country rather than to hedge sovereign debt. Removing the restrictions on uncovered sovereign CDS may therefore enable market participants to better manage the risk of investing in the U.K. One of the key purposes of cover requirements is to prevent settlement failure which can arise from short sales of more instruments than are available in the market. The U.K. government does not perceive this to be a meaningful risk in the context of the size and liquidity of the U.K. sovereign debt market. The EU by contrast maintains a full reporting and conduct regime for short sales relating to  EU sovereign issuers.  U.K. sovereign debt and sovereign CDS are still in scope of the FCA emergency powers, which we discuss below. The revised U.K. regime, which is intended to enhance the competitiveness of the U.K. markets, will, in this respect, be narrower than the EU short selling regime.

The U.K.'s abandonment of short reporting on U.K. sovereign debt may also reflect a difference in policy and perspectives on financial markets. The U.K.’s short selling regime prior to the introduction of the EU SSR did not include cover or disclosure requirements for sovereign debt or sovereign CDS. The EU introduced the Short-Selling Regulation following the shorting by market participants of various EU countries' sovereign debt instruments during the European debt crisis of 2010-2012. These aspects of the EU SSR may be regarded as somewhat of a political measure related to popular discourse, blaming financial markets for those countries' ratings downgrades, devaluations and tax and spend woes. Such perspectives have never had much political traction or interest in the U.K., which has been an investment grade sovereign issuer for decades.  Even when financial markets have taken positions detrimental to the U.K. government as an issuer or its currency (e.g., during Liz Truss's recent government), this has generally been regarded in the U.K. as a fair response by the market to political circumstances, as opposed to participants in financial markets driving an agenda.

Moving detailed requirements to FCA rules

The FCA is able to make rules in relation to the designated activity of entering into a short sale of an admitted share and related transactions, as specified in the SSR 2025. The SSR 2025 specifically state that the rules may include cover requirements, such as requiring persons entering into a short sale of an admitted share to make arrangements to ensure or create a reasonable expectation that the settlement of a short sale transaction can be effected when due and rules about the types or features of an agreement or arrangement that satisfy the requirement. The requirements for these arrangements are currently set out in the U.K. SSR. Moving these obligations to the FCA’s Handbook will ensure that changes to the rules can be made in response to market conditions and other developments, without invoking the time-consuming and time-constrained process for U.K. legislation, and also prevent settlement failure from disrupting the market. The FCA is due to consult on its proposed rules and will consider the feedback to the government’s Call for Evidence.

The SSR 2025 also empower the FCA to make designated activity rules as follows:

• Requiring a significant net short position in the issued share capital of a company to be reported to the FCA. Under the SSR 2025, the threshold remains at 0.2%. These designated activity rules may set out the circumstances in which a person is considered to hold a share, the calculation of a net short position (transactions to be taken into account, treatment of short or long positions held by group entities or under fund structures), and when the notification must be made or updated. When proposing rules, the FCA will take into account feedback to the government’s Call for Evidence, such as the report submission deadline, the lack of definitive data on total issued share capital for calculating net short positions and the FCA’s operational arrangements.

The FCA will be obliged to publish and keep regularly updated a list of admitted shares to which its short selling rules apply. The FCA is currently required to maintain a “negative” list of shares which are exempt from the main short selling obligations where the principal venue for trading of the share is in an overseas country.  Changing to a “positive” list, as per the approach in Hong Kong, should provide more legal certainty regarding whether the reporting obligation applies.

• Providing for waivers or exemptions from the above rules, either for certain shares or for certain market participants. As mentioned above, these powers may be used to exempt trades that are principally traded on a non-U.K. venue.   

In addition, exemptions are expected for market making and those engaged in stabilisation.  Those relying on either of the exemptions will likely need to notify the FCA. The detail on the exemptions will be consulted on by the FCA, who will consider the feedback to the Call for Evidence, including simplifying the requirements to reduce the overall burden on firms. 

The market making exemption may only be made for the market making activities of an investment firm, bank or overseas entity that is a member of a U.K. trading venue (exchange or MTF) or a non-U.K. trading venue in a jurisdiction that has been “designated” by HM Treasury. This marks a notable shift by the U.K. from the EU’s equivalence regime. The U.K.’s new regime does not require the overseas jurisdiction  to be equivalent in order for a designation to be made. 

A designation of a jurisdiction may be made only if it would be compatible with protecting the integrity of the U.K. financial system and it facilitates the international competitiveness of the U.K. In addition to any other matter that HM Treasury considers relevant, the updated SSR 2025 state that the following may be taken into account by HM Treasury:  the jurisdiction’s regime for markets, its rules for admission of securities to trading, market transparency and integrity and the prevention of insider dealing and market manipulation. Legislation designating a jurisdiction may be annulled by resolution of either House of Parliament. 

Notably, the SSR 2025 provide that each EEA state is to be treated as designated under the new regime. This means that the existing equivalence under the Short Selling Regulation Equivalence Directions 2020 is retained. This approach contrasts with the EU position which affords no such recognition to U.K. markets, or any other non-EU markets. To our knowledge, no indications have been made by the U.K. government regarding designations for jurisdictions other than those in the EEA.

FCA powers in exceptional circumstances

In addition to the power to make the above rules, exemptions and waivers, under the SSR 2025, the FCA will retain its current emergency powers relating to short selling, to address exceptional circumstances. The powers are similar to FCA’s powers under the existing U.K. SSR (and those of the EU authorities under EU SSR). However, under the revised U.K. regime, the FCA’s powers will be broader and allow more flexibility without imposing detailed or prescriptive legislative provisions on the circumstances in which the FCA may exercise its powers. Instead, provided the FCA considers it appropriate to exercise the powers to prevent a disorderly decline in the price of a financial instrument and that its actions will not have a detrimental effect on the efficiency of the U.K. financial markets, the FCA will be able to exercise its powers in “such circumstances or subject to such exceptions” as it considers appropriate.

The emergency powers are generally not limited to shares traded on U.K. venues, so they could in principle also apply to debt instruments and other non-equity instruments (including sovereign-issued instruments).

The FCA will be able to use these powers to:

• Require information to be provided to it

Such information could relate to net short positions held in shares or of positions held when a person enters into a short sale of a financial instrument or related instrument.  The FCA may also require any person lending a financial instrument to notify the FCA of any significant change in the fees requested for such lending.

• Impose bans and impose conditions

The FCA will be able to prohibit the short sale of, or impose conditions on, the entering into of short sales of financial instruments, including sovereign instruments, or related instruments. Where, in the FCA’s view, the price of a financial instrument on a U.K. trading venue has fallen significantly during a trading day in relation to the previous days’ closing price on that venue, the FCA will be able to ban or impose conditions on short sales or related transactions in that financial instrument. 

The FCA will also have a power by direction to impose requirements relating to a requirement, ban or condition imposed by the FCA using these powers. 

The FCA must still publish a notice of its decisions made using its emergency powers, setting out its reasons and the time period that applies. A new requirement will be imposed on the FCA to prepare a Statement of Policy on its approach to using its powers for exceptional circumstances. The FCA will consult on its proposed approach. This should provide market participants the opportunity to voice any concerns, for example, on clarity of the scope of any ban and the adverse operational complexities if any ban were to extend to, for example, baskets, indices and ETFs.

Buy-in procedures

Buy-in is a remedy for situations where a short position holder does not deliver a financial instrument within a certain number of days of the settlement date. Under a buy-in process, the purchaser is able to purchase the financial instrument from a third party and then payment is made between the purchaser and seller regarding the difference in price to restore the parties to the economic position they would have been in without the settlement fail. Under the SSR 2025, “buy-in” is defined as the procedure initiated by a central counterparty (“CCP”) to acquire and deliver shares of the same description where a seller has failed to deliver the shares for settlement.

The SSR 2025 retain the existing U.K. SSR provisions regarding buy-in, and does not provide for any FCA rules in this regard. However, the FCA will have a power to give directions regarding the failure to comply with these requirements. U.K. CCPs providing clearing services for shares must have procedures for automatically triggering the buy-in of shares that are not delivered for settlement before the end of four working days. Where buy-in is not possible, in-scope CCPs must ensure that an amount is paid by the person failing to settle to the buyer of the shares based on the value of the shares at delivery date plus any losses incurred by the buyer. U.K. CCPs must also ensure that a seller that fails to deliver shares for settlement by the intended settlement date makes daily payments to the CCP for each day that the failure continues. Since the rules in this regard are unchanged, there would unlikely be a need for material substantive amendments to provisions of trading agreements between financial institutions and their clients concerning conduct and indemnities for buy-in.

Supervision & enforcement

Under the DAR regime, a person carrying on a designated activity must comply with the applicable legislative requirements and regulator’s rules unless an exemption is available. The SSR 2025 permit the FCA to impose requirements on a person relating to the carrying on of the two short selling designated activities if a person is failing or likely to fail to comply with the rules.

The updated SSR 2025 and the Financial Services and Markets Act 2000 (Designated Activities) (Supervision and Enforcement) Regulations 2025 (the “DAR Supervision Regulations”), replace the FCA’s short selling supervision and enforcement powers with powers to supervise and enforce the new regime. The DAR Supervision Regulations entered into force on January 14, 2025.

The FCA will be able to impose requirements on a person carrying on a designated activity by issuing a direction. The direction may require a person to take certain action or to refrain from doing so. The FCA will also be able to issue public censures, impose penalties, impose restrictions or ban persons from carrying on an activity.

Timing

The SSR 2025 enters into force in two stages. Certain provisions entered into force on January 14, 2025, including those:

• Creating the designated activities;
• Granting the FCA powers to (i) make rules relating to short selling of admitted shares and related transactions; (ii) make rules requiring notification of significant net short positions in the issued share capital of a company; (iii) provide for waivers and exemptions from the rules, including exemptions for market making activities and stabilisation; and (iv) issue guidance and issue statements of policy. The FCA’s powers in exceptional circumstances are not yet in force;
• Requiring the FCA to publish the ‘positive’ list of shares to which the rules apply; and
• Empowering HM Treasury to make designations for the purpose of the market making exemption. 

The remaining provisions come into force on the “main commencement” day, which will be the day that the existing U.K. SSR is revoked. The FCA rules will also apply from this date. While we do not have a date yet, it is expected that the entire revised U.K. regime will enter into force during 2025.

Footnotes

1. The U.K. authorities will still receive data from the industry on sovereign debt and CDS via other existing regulatory regimes such as Sterling Money Market data, the Markets in Financial Instruments Regulation, the European Market Infrastructure Regulation and the Securities Financing Transaction Regulation, as they form part of domestic U.K. law.

2. Under the SSR 2025, a short sale in relation to a financial instrument means any sale of the instrument which the seller does not own at the time of entering into the agreement to sell including such a sale where at the time of entering into the agreement to sell the seller has borrowed or agreed to borrow the instrument for delivery at settlement, but not including—
(a) a sale by either party under a repurchase agreement where one party has agreed to sell the other a security at a specified price with a commitment from the other party to sell the security back at a later date at another specified price,
(b) a transfer of securities under a securities lending agreement, or
(c) entry into a futures contract or other derivative contract where it is agreed to sell securities at a specified price at a future date.