MFA submitted a letter to HM Treasury in response to the Call for Evidence on the UK’s Short Selling Regulation Review highlighting that the review presents a unique opportunity to enhance UK capital markets and cement the City as a global financial services leader, to the benefit of the UK economy.
The letter in response to HM Treasury’s call for evidence enumerates the many benefits of short selling, including enhancing price discovery, improving market liquidity, reducing volatility, detecting corporate fraud, reducing the risk of market bubbles, and helping achieve ESG goals. However, MFA stresses that short selling is hampered by the current regulatory framework. The letter outlines targeted modifications to current short selling rules that will enhance the efficiency of UK capital markets and unlock greater investment opportunities across the UK. In the letter, MFA recommends:
- Moving away from individual firm public disclosure of net short positions. MFA highlights research showing the current disclosure regime has a chilling effect on short selling and causes herding behaviour. Instead, MFA suggests publicly disclosing the aggregate net short positions on an issuer-by-issuer basis. This approach would promote market efficiency and price discovery while providing meaningful data transparency.
- Addressing operational challenges related to position reporting to the regulator. MFA supports reporting short positions to regulators but urges policymakers to consider improving the data and systems for reporting to deliver greater efficiency to the market. Additionally, MFA recommends the regulatory reporting thresholds be analysed and that policymakers consider increasing subsequent reporting increments to reduce the number of reports and the associated cost.
- Providing more clarity and guidance on the implementation of short sale bans. Evidence shows that short sale bans ‘do more harm than good’ for global markets and market participants as they exacerbate volatility and hurt market liquidity. Therefore, MFA applauds the FCA for refraining from deploying short selling bans when other regulators decided to do so during periods of market volatility. However, providing more upfront clarity on the requirements and capabilities related to short sale bans would greatly help market participants be fully prepared for unlikely scenarios.