The United Kingdom Financial Services Authority (“FSA”) has published a Discussion Paper (DP09/1) relating to short selling.  

The Discussion Paper is the result of the wider review of short selling which has been referred to in the context of the restrictions on short sales of UK financial stocks. These restrictions have been lifted, although a disclosure regime does apply in respect of UK financial sector companies (FSA Confirms Relaxation of Ban on Short Selling; Retains Disclosure Obligation, SRZ Alert, 14 Jan. 2009) and companies undertaking rights issues (UK FSA Rule on Short Selling in Rights Issues Effective 20 June 2008, SRZ Alert, 16 June 2008; UK FSA Issues Guidance on New Short Selling Rule, SRZ Alert, 18 June 2008).  

The Discussion Paper does not set out any specific rule changes, but is rather intended to set out the broad policy framework which the FSA is considering and invites responses to various suggestions and preliminary conclusions. The FSA is participating in supra-national working groups on short selling established by IOSCO and CESR (the Committee of European Securities Regulators) and indicates that it is important that the UK regime fits into any international regime as far as possible.  

Under the framework contemplated, there would be no prohibition on short sales (although the FSA would reserve the right to introduce emergency restrictions). However, there would be a new disclosure regime which would apply to net short positions in any UK-incorporated and listed company. This would be similar to the existing disclosure regime (which applies until 30 June 2009) in relation to UK financial sector stocks. However, the initial threshold would be set at 0.5% of the issued capital of the relevant company, unless the company was undergoing a rights issue when the initial threshold would be set at 0.25%. In either case, there would then be an additional disclosure threshold at each 0.1% above the initial disclosure threshold. Any net short position (whether increasing or decreasing) which crossed a disclosure threshold would have to be disclosed.  

The Discussion Paper sets out the arguments for and against the various types of disclosure, but it is clear that the preference is for public disclosure of individual net short positions. The FSA's position, as set forth in the Discussion Paper, is that confidential disclosure, or aggregate disclosure of aggregate net short positions, would not achieve its regulatory objectives.  

The FSA invites comments on the Discussion Paper by 8 May 2009. It should be noted that submissions will normally be publicly available unless specifically requested otherwise.  

The Discussion Paper is available at: http://www.fsa.gov.uk/pubs/discussion/dp09_01.pdf