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The UK Government’s freshly introduced rules for Short Selling have sparked lively debate about the degree to which the changes will improve transparency in Financial Markets, with some experts declaring it a victory for Asset Managers “concerned about copycat behavior [and] short squeezes”. The changes follow alterations to the existing Short Selling Regulation (SSR) resulting from repeals of European Union legislation following the UK’s withdrawal from the EU in 2020.
The State of Play
Under the UK Short Selling regime, firms have to report to the Financial Conduct Authority (FCA) any net short positions in shares of companies trading on a UK market when those positions reach 0.2% of a company’s issued share capital.
When these short positions then reach or exceed 0.5%, the UK’s financial watchdog publicly discloses these positions on its website, identifying the firms or individuals who have made the trades.
However, as part of the changes made to the UK Short Selling regime, the regulator will instead only make public the aggregated net shorts of all firms or people who hold short positions equal to or in excess of 0.2% of a company’s issued share capital, but crucially not publicly disclose the identity of the firm or persons making the trades.
The anonymity changes came into force from 14 January 2025, while the full amendments to the rules will become effective later on in 2025 once the existing UK SSR is revoked. However, at the time of reporting, no official date has been set for this.
In its call for evidence, the Treasury said the Government views short selling an “an essential tool to facilitate effective market functioning” given its support for Liquidity, effective price discovery, and Risk Management.
However, according to the Treasury, the Risks associated with short selling can “impact on wider market confidence” and it, therefore, anticipates its new approach “will ensure that the UK has an agile and internationally respected short selling regime that supports a thriving, internationally competitive financial services sector, contributing to the UK’s economic growth while providing appropriate safeguards”.
Through various conversations with regulators and the Government, Investment Week understands the core rationale behind this decision from the UK Government is an aim to reduce the Risk of overreactions in the market, which can be caused when specific firms’ or individuals’ short positions are made public.
Therefore, despite the anonymity of the positions under the new regime, publishing Aggregated Data will still provide the market with a view of overall sentiment and activity, consequently ensuring market trends more broadly remain transparent.
Market Reaction
Since the changes were announced, the Regulation has been greeted with mixed responses. Thomas Donegan, a Partner in the Financial Services Advisory and Regulatory Group at law firm A&O Shearman, said: “This is a welcome change, particularly for Asset Managers who for years have been concerned about copycat behavior, short squeezes and potentially revealing trading strategies.”
Donegan added that the changes, which will continue to see the FCA publish short positions every working day, albeit anonymized and aggregated, “are intended to encourage more trading activity and greater Liquidity in UK markets”.
Kifaya Belkaaloul, Head of Regulatory at FinTech firm NeoXam, echoed Donegan’s analysis, adding: “The UK Government’s shift to anonymized, Aggregated Data for short selling is a welcome step towards balancing market transparency with the privacy of Investment Managers.”
She also explained that “this new approach ensures key market trends remain visible, while also addressing concerns over excessive exposure of individual short positions”, consequently representing “a thoughtful evolution in Regulation, reflecting a more sophisticated understanding of Financial Markets post-Brexit”.
However, Ben Yearsley, Director at Fairview Investing, took a different approach. “Arguably, it is far less transparent now as to why is the FCA not disclosing who holds?” he said.
In response to the law firms’ warm welcome of the changes, Yearsley said: “I would counterpoint and say, why should short sellers be hidden and longs have to declare?”
“I am sure there is some logic there somewhere but I cannot seem to find it,” the Fairview Director added.
Yearsley’s qualms with the fresh Regulation were not isolated, as Chelsea Financial Services Managing Director Darius McDermott noted: “We prefer the current regime”.
He continued: “We are all for transparency, so we believe that all short positions should be identified.”
The Impact of Change
Under the FCA’s new disclosure rules, fellow market participants would be able to gauge the number of shorts taken out on a stock, but not the firm or individual behind the trade.
On 29 August 2024, Hedge Fund Millennium International Management took out the largest short position of the year (2.79%) on Burberry, the month where the majority of shorts were taken out on the fashion house for 2024, according to the FCA.
Earlier this month, Investment Week revealed that British staple consumer brand Burberry had surpassed ASOS to become the most shorted UK stock of 2024. The 1856-founded luxury fashion house had 208 shorts taken out on it during the course of last year, making the FTSE 250 company the only stock to eclipse the 200 figure.
One place behind the renowned tartan and trench coat designer on the podium was ASOS, which saw 185 bets taken against its share price value.
Asset Management giant Abrdn was also the subject of 116 shorts, with beer producer Kingfisher and aviation firm Wizz Air among the top five most shorted stocks of the year.
More recently, in another episode within the saga making waves in the UK Investment Trust world, two Hedge Funds, run respectively by former Goldman Sachs Partner Ed Eisler and prominent Boston Economist Andrew Weiss, took shorts out on two of the seven investment trusts in a tussle with Saba Capital.
According to filings with the FCA, the $4.5bn Brookdale International Partners hedge fund, owned by Weiss Asset Management, has built up short positions against Herald investment trust (HRI) – which defeated all eight of Saba’s resolutions in a general meeting last week (22 January) – and Edinburgh Worldwide Investment Trust (EWI), another of the seven Saba targets. Joining Brookdale’s bet against Herald is Eisler Capital, co-founded by Eisler, which took a 0.5% short position out on HRI earlier in January.
“I honestly cannot see how the changes will help, hinder or change that much,” said Fairview’s Yearsley. “Long positions get disclosed above a specific threshold, so why not short?” he added.
