On 9 August 2018, HM Treasury published a further financial services related draft statutory instrument (draft SI) under the European Union (Withdrawal) Act 2018. The draft SI, The Short Selling (Amendment) (EU Exit) Regulations 2018, is intended to ensure that the EU Short Selling Regulation continues to operate effectively in the UK once the UK has left the EU.

In particular, the explanatory memorandum to the draft SI states that changes for firms with shares admitted to trading on a UK venue are anticipated to be minimal. The current mechanics for firms submitting relevant notifications for UK instruments to the FCA will be retained and instruments admitted to trading on UK venues will continue to have the same restrictions applied to them.

Part 3 of the draft SI corrects deficiencies in retained EU law relating to short selling. These changes include:

  • amending the scope of the regulation to relate to instruments admitted to trading on UK venues and UK sovereign debt only. The amended UK short selling regime will not capture instruments admitted to trading or traded on an EEA trading venue;
  • deleting provisions to facilitate cooperation and coordination across the EU;
  • amending the exemption where the principal trading venue is in a third country. Under the amended UK short selling regime the FCA will take on responsibility for collating and publishing the list of shares principally traded in a third country. This will include shares which have their principal trading venue outside of the UK, including those in the EU. To ensure continuity for firms the draft SI allows the FCA to recognise ESMA’s existing list for 2 years following the UK’s exit from the EU;
  • exemptions for market makers and authorised primary dealers. Under the EU short selling regime, there are certain exemptions for market making activities and primary market operations. To benefit from the exemption, a market maker must notify the competent authority of its home Member State that it intends to make use of the exemption no less than 30 days before it first intends to use the exemption. The draft SI includes a provision to ensure that notifications made to the FCA ahead of Brexit will remain valid. To benefit from the exemption EU market makers will be required to join a UK trading venue and submit a notification to the FCA at least 30 days ahead of the UK’s exit, to enable a smooth transition, in a scenario where the UK was not entering an implementation period. This is consistent with how the UK treats other third countries;
  • scope of powers to address threats to financial stability or market confidence. The UK will be allowed to take action on any instrument admitted to trading on a UK venue, not just those for which it is the most liquid market; and
  • the draft SI will allow market participants to use UK sovereign credit default swaps (CDS) to hedge correlated assets or liabilities located anywhere in the world, rather than just in the EU. This will ensure UK firms can continue to use UK sovereign CDS to hedge correlated assets or liabilities issued by issuers located outside the UK.

The FCA will also be updating its Handbook. The FCA has confirmed its intention to consult on Brexit related amendments to its Handbook in the Autumn.