This week, on the 1st February 2021, the Statutory Instrument (SI) amending the initial notification threshold under Article 5(2) of the Short Selling Regulation (SSR) entered into force.

The SI amends the reporting of net short positions to the Financial Conduct Authority (FCA), in relation to the issued share capital of a company that has shares admitted to trading on a trading venue, from 0.2% to 0.1%.

In March 2020, ESMA made a temporary decision to apply a threshold of 0.1% for shares admitted to trading on regulated markets in EEA Member States – this has subsequently been renewed a number of times and is due to expire on 19th March 2021. However, this decision ceased to have effect in the UK on 31 December 2020 – at the end of the Brexit transition period – meaning that the threshold reverted to 0.2%.

The UK SSR applies to the short selling of sovereign debt, shares that are admitted to trading on a UK trading venue, and related instruments, and the use of credit default swaps.

It requires holders of net short positions in shares admitted to trading on a trading venue in the UK (unless they are exempt) or UK sovereign debt to make notifications to the FCA once certain thresholds have been breached.

Position holders without an automated shareholder disclosure solution should review the FCA FIRDS to establish if a particular share is admitted to trading in the UK. Additionally, similar to the EU regime, certain shares are exempt from the short selling notification requirements. The UK list of exempted shares can be viewed here.

This is a particular important divergence from the EU short selling regulation. Under the current EU regime, the notification requirements only apply to shares admitted to trading on a “regulated market”.

In comparison, the UK regime now applies to shares admitted to trading on a UK MTF as well as a UK regulated market. Although the UK SSR regime now includes instruments traded on a further 85 UK trading venues, the FCA believes that by applying the 0.1% threshold to regulated markets and MTFs, it should result in a simpler, less burdensome regime.

A private share notification must be made when the net short position in shares reaches 0.1% of the issued share capital of the company, and again at each 0.1% threshold thereafter. This applies to both 0.1% increase and decrease of the position, including when the position drops below 0.1%.

When the position reaches 0.5%, a public notification must be made. A public notification must be made again at each 0.1% threshold above 0.5%.

Once a public disclosure has been made, it can be viewed on the “short position daily update” published on the FCA website.

There are also UK sovereign debt thresholds which haven’t changed and can be viewed here.

Short positions which breach a threshold should be reported to the FCA by 3.30pm on the trading day after the day the position was reached.

Calculations should be made at midnight on the trading day.

Introduced last year, UK short selling notification must now be made through the Electronic Submission System.

To notify the FCA of the short position, users must complete the necessary fields within the ‘NSP Share Notification – New’ online form. The Position Holder ID will be auto-populated and non-editable once the users completes the ‘Select Position Holder’ field. ‘Issuer ISIN Code’ will also be pre-populated based on the value entered in the ‘Select Position Holder’ field and ‘Issuer Full Name’ will be pre-populated based on the value entered in the ‘Issuer ISIN Code.’

Early in October last year, the FCA fined a Hong Kong hedge fund just over £870,000 for failing to disclose its net short position in Premier Oil Plc. It was the first time the FCA had taken enforcement action for a breach of the SSR.

Between February 2017 and July 2019, ARCM built a net short position equivalent to 16.85% of the issued share capital in Premier Oil, which is one of the largest short positions in UK history. ARCM incorrectly believed that the notification obligation did not apply to its trading in derivatives.

Asia Research and Capital Management Ltd (ARCM) agreed to resolve the matter and qualified for a 30% discount under the FCA’s executive settlement procedures. Were it not for this discount, the FCA would have imposed a financial penalty of £1,247,312.25 on ARCM.