The UK’s Financial Conduct Authority (FCA) has taken its first-ever enforcement action for a breach of the Short Selling Regulation (SSR).
The market regulator has fined Hong Kong-based asset management firm Asia Research and Capital Management (ARCM), for failing to disclose its massive net short position in Premier Oil, a UK oil company, which it opened in February 2017 and built to 16.85 percent of issued share capital by July 2019.
At the time this was the largest net short position held in an issuer admitted to the authority’s official list with shares admitted to trading on the main market of the London Stock Exchange.
The FCA has now handed it an £873,118 fine for its transparency failings, which included a 30 percent discount under its executive settlement procedures through its cooperation with the enforcement.
Previously, the fund was estimated to have earned around £135 million from its short position during this period, according to Breakout Point, which tracks European short selling activity, but this figure is disputed by the regulator.
An FCA spokesperson tells SLT: “We are aware that there were reports published when this issue was first made public about the firm’s profit.
"In reality, there was no short selling profit. The reports were speculative and related to the size of ARCM’s total short position, which was equivalent to £103 million of Premier Oil’s shares.
"The reports failed to understand the nature of the firm’s net short position and that the £103 million figure was neither the profit envisaged nor the profit achieved. This fine relates directly to the firm’s failure to disclose its position."
"That makes this a substantial fine, given there was no profit, which reflects how seriously we take this type of misconduct," the spokesperson adds.
Commenting on the enforcement, Matt Smith, CEO of SteelEye, a UK regtech firm, says: “It is good to see that the FCA are increasing their scrutiny on regulatory infringements, as they said they would do.
"We have been warning financial firms that, as regulations start to bed in, investigations by the regulator will increase. This is a trend that will only continue and is why firms need to prioritise their regulatory processes.”
"The FCA has consistently said that they want firms to demonstrate that efforts have been made - this is mirrored by the discount provided to the fund for good behaviour during the investigation.”
What happened?
ARCM manages a series of long-duration closed-end investment vehicles focused primarily on investing in debt and equity securities across Asia, and which infrequently trades in EU markets.
On 17 October 2016, it began investing in Premier Oil through the acquisition of a debt instrument via a secondary market transaction. It continued to increase this position until December 2019.
To hedge its credit risk exposure, the asset manager entered a series of equity swaps which it also built over the period.
The EU’s SSR sets out a threshold of 0.2 percent of the issued share capital and each 0.1 percent above that for when a firm, regardless of where it is based, is required to notify the relevant national competent authority and disclose to the public details of net short positions held.
From 22 February 2017 to 3 December 2019, the fund neglected to make 155 notifications to the FCA and 153 disclosures to the public of its net short position in Premier Oil that exceeded these limits.
ARCM’s short position peaked in July 2019 and it held here for a further 106 trading days before notifying the regulator and disclosing its position to the public.
The firm has significantly reduced its position in Premier Oil since 2019 but remains the holder of the largest short position representing 6.2 percent of the free float, as of September, according to Ortex Analytics.
As of 12 October, utilisation of Premier Oil shares available to lend was 85 percent, while cost-to-borrow was 14.28 percent.
Premier Oil’s share price meanwhile has fallen from a five-year high of £147 in October 2018 to a five-year low of £15.2 yesterday.
The FCA’s executive director of enforcement and market oversight Mark Steward says: “Failure to report disclosable short positions undermines the integrity and efficiency of financial markets.
“ARCM repeatedly breached reporting rules and failed to provide important information to us and to the market. This fine reflects the seriousness of these breaches.”
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