Short selling is a vital tool benefiting investors and markets
HM Treasury has a golden opportunity to address fundamental flaws in current SSR, including the ‘distorting’ individual firm public disclosure rule
MFA recommends instead publicly disclosing the aggregate net short positions on an issuer-by-issuer basis
LONDON, UK— Managed Funds Association (MFA), the trade association for the global alternative asset management industry, urged HM Treasury to fix the UK Short Selling Regulation and strengthen UK capital markets. MFA submitted a letter 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 UK government has the opportunity to realise the benefits of short selling by creating a regulatory regime that promotes transparency without harming UK markets. Short selling is a powerful tool that benefits investors and markets. It enhances price discovery, improves market liquidity, reduces volatility, and exposes corporate fraud and abuse,” says MFA Head of Global Government Affairs Jillien Flores.
“During periods of economic uncertainty like we’re experiencing today, short selling plays an integral role in stabilising markets and helps market participants carefully navigate risk. This consultation is a welcome opportunity to review harmful short selling rules and make UK capital markets more attractive, efficient, and competitive.”
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.
MFA’s full letter is available here.
About the Global Hedge Fund and Alternative Asset Management Industry
The global hedge fund and alternative asset management industry, including hedge funds, credit, managed futures, and hybrid funds that invest in private companies, has assets under management of over £3.3 trillion (Q4 2022). The industry serves thousands of public and private pension funds, charitable endowments, foundations, sovereign governments, and other global institutional investors by providing portfolio diversification and risk-adjusted returns to help meet their funding obligations and return targets.
About the Managed Funds Association
Managed Funds Association (MFA), based in Washington, DC, New York, and Brussels, represents the global alternative asset management industry. MFA’s mission is to advance the ability of alternative asset managers to raise capital, invest, and generate returns for their beneficiaries. MFA advocates on behalf of its membership and convenes stakeholders to address global regulatory, operational, and business issues. MFA has more than 160 member firms, including traditional hedge funds, crossover funds, and private credit funds, that collectively manage nearly £2.2 trillion across a diverse group of investment strategies. Member firms help pension plans, university endowments, charitable foundations, and other institutional investors to diversify their investments, manage risk, and generate attractive returns over time.