The UK’s Financial Conduct Authority (FCA) has taken its first enforcement action for a breach of the Short Selling Regulation (SSR) which require holders of short positions to disclose to the FCA and the issuer. The FCA fined a Hong Kong based hedge fund, £873,118 for their failure to disclose their short positions in Premier Oil plc, a UK incorporated and listed company. Premier Oil announced its proposed merger with Chrysaor Holdings Limited on 6 October after a reduction in its share price since 2017.
The hedge fund said it hadn’t realised it had built up a short position of 16.9% of the issued share capital of Premier Oil and reported it as soon as it was aware. In total the hedge fund had missed 155 mandatory net short position disclosure filings.
The FCA reduced the fine by 30% for good behaviour during the investigation. The FCA is reported as saying, “That makes this a substantial fine, given there was no profit, which reflects how seriously we take this type of misconduct.”
Short selling position disclosure obligations
The obligation to report short positions began in 2008 as a result of the financial crisis. Since then, more countries have implemented short position reporting. This was introduced to identify those building short positions which could damage the stability of the financial markets. In comparison to other shareholding reporting obligations, the thresholds for short position reporting are very low. Across Europe, the reporting threshold begins at -0.2%, however as a result of COVID-19, ESMA issued a decision in March this year lowering the reporting threshold to 0.1%. Other changes are afoot for the UK reporting regime as it leaves the EU on completion of the Brexit transition period on 31 December 2020.
How could the hedge fund not be aware of such a substantial short position?
It may seem strange that the hedge fund was not aware it had built up such a large short position of 16.9%. However this IS possible, as those responsible for reporting are often part of Compliance or Operations functions of financial organisations and therefore are not aware of the investment decisions made by traders or fund managers, unless they have access to an automated system that calculates positions in the many different ways that are required by each reporting regime and in each different jurisdiction.
Those responsible for reporting require knowledge of the myriad of global shareholding disclosure rules and subsequent changes to those rules. Managing shareholding disclosure obligations is not an easy task; I know because I have managed it for some the largest global financial institutions.
How important is it to understand and comply with these regimes?
The complexity of these disclosures is often misunderstood as purely being a case of monitoring thresholds. When in fact each shareholding disclosure requirement, whether it be the major shareholding* obligations or the short selling disclosures, all require different derivatives to be included, different netting to apply, different aggregation methodology and different exemptions. Even within the EU short position reporting regime, there are netting differences applied to those who hold a position as a fund manager compared to those on the trading desk of an investment bank.
Mark Steward, the FCA’s executive director of enforcement and market oversight, highlighted the importance of compliance with these shareholding disclosure regimes when he said, “Failure to report disclosable short positions undermines the integrity and efficiency of financial markets”.
This fine clearly marks the importance of monitoring global shareholding rules and the dangers of not doing so.
Kaizen can offer peace of mind with our easy-to-use platform and hosted customised rules engine incorporating aosphere LLP’s (an affiliate of Allen & Overy LLP) shareholding disclosure rules library as a basis for the service. The system further enhances and interprets this with our regulatory expertise, alerting you of your reporting obligations so you do not miss these critical filing deadlines.
*also referred to as substantial or long reporting.