His Majesty’s Treasury (HMT) issued a call for evidence to improve the UK’s Short Selling Regulation (SSR), and we answered.
Our clients sent a total of 8,663 short position reports to the FCA in 2022, approximately 22% of all reports filed. We felt it was important for us to represent our client’s interests to help to improve the regime and the UK’s international competitiveness.
Read the full letter below:
Dear HMT,
We are a regulatory software firm providing services to over a hundred of the largest financial institutions in the world. For over 10 years, we have helped to monitor and automate their shareholding disclosure requirements; we now service assets in the vicinity of 15 trillion USD. As a market leading fintech firm we have benefitted from the UK financial services industry which is supported by commercial freedoms and robust regulatory protections.
We will not make the case for or against short selling from an economic perspective, nor will we touch on any need for fundamental reform to the regime. Instead, we will focus on our area of expertise: reporting systems and how they impact our clients.
We do however note that the number of jurisdictions with short selling disclosure requirements is generally increasing and that where appropriate technology is deployed, they can operate effectively.
Our clients sent a total of 8,663 short position reports to the FCA in 2022, approximately 22% of all reports filed. The main issue they describe when it comes to reporting costs and burdens is having to file reports one at a time.
The best way of reducing costs and burdens is to automate existing processes. In order to do so, the FCA should implement an Application Programming Interface (API) to allow for bulk uploads of short position reports via the existing web portal.
Other than the time-saving of allowing for bulk uploads, an API would have the following additional advantages:
In 2022, we approached the FCA’s Position Monitoring Unit with a proposal to assist with implementing an API.
There are further data issues with the FCA’s Electronic Submission System (ESS), the FCA’s exempted shares list, and how both relate to the FCA’s Financial Instruments Reference Data System (FIRDS); these issues increase the burden of compliance and are discussed below in response to Question 24.
We are strongly in favour of the FCA publishing a positive list rather than the current (negative) exempted shares list.
Under the current system, when it comes to determining which shares are in scope, a firm has to work out:
The firm then attempts to make a disclosure via the ESS.
In order to work out a), FIRDS is used. The problem with this approach is that there are known data issues with FIRDS which can incorrectly state where a firm is admitted to trading.
The problem with b) is that the exempted shares list has its own data issues. For example, shares that have been admitted to trading since 1 November 2022 will not be added until 1 April 2023.
Compounding these issues is the ESS list. Even when a firm has conducted further due diligence and has found that the share is in scope for the SSR and a disclosure is required, the ESS list may not have the share listed; the ESS portal does not accept disclosures on shares that are not on its list, so a firm is unable to make a disclosure to comply with the regulation.
Out of any jurisdiction in the world, the issues associated with the negative list are the leading cause of our client’s complaints and frustrations.
Clearly there are data challenges with updating the exempted shares list and the ESS List; it is onerous and time consuming for FCA staff and presents an obvious issue for market participants who have to undertake further due diligence than should be required and are sometimes simply unable to comply with the regulation.
It would be a much simpler process for market participants if there was a positive list to reference. A positive list should be available in a structured format which is amenable to automated processing.
It is also suggested that it is very difficult to short the securities of smaller companies, therefore in addition to establishing a positive list, HMT could consider limiting the list to larger companies. By limiting the shares in scope of the regulation, the FCA would not be losing any valuable data. The FCA’s sole focus is on larger companies where shorting can occur at scale and cause market volatility. Limiting the list would further reduce the risk of error for investors.
We frequently find ourselves explaining to clients the incredibly broad nature of the UK’s regime which was designed from an EU perspective on short selling. The regime causes confusion and frustration, and due to the overly inclusive nature of the system of exempted shares, it bears no meaningful relation to the risk that it is supposed to be preventing.
A positive list with only relevant issuers combined with an API would mean increased compliance with the short selling regulation, more focussed supervision by the FCA, less time and money being spent by the FCA on maintaining lists, and it would increase the UK’s competitive advantage.
In order for the UK to remain a competitive, innovative, attractive and internationally respected financial ecosystem, the FCA should adopt these suggestions.