UK government to loosen sovereign debt and CDS short selling restrictions under new regime
28 November 2023 UK
Image: photomic/stock.adobe.com
The UK government has agreed to remove requirements currently placed on investors relating to short positions in sovereign debt and sovereign credit default swap (CDS) contracts under the UK’s new short selling regime.
It follows the closing of a follow up consultation put forth by HM Treasury (HMT) in July on the Short Selling Regulation (SSR) — a regulatory package that was introduced by the EU and brought onto UK statute following its exit from the EU.
The consultation discussed aspects of the SSR related to sovereign debt and CDS, and was a result of a call for evidence which was issued by HMT in December 2022.
The Treasury received seven responses to the consultation, six from trade associations and one from a standard-setting organisation.
All of the respondents agreed with the analysis of the current SSR requirements as set out in the consultation document.
Several respondents emphasised that, “given the size and liquidity of sovereign debt markets”, they do not see the same need for covering requirements for sovereign debt and CDS as for equity markets.
In discussing removing restrictions on sovereign debt contracts, several responses emphasised that the existing requirements are ‘unnecessary’, particularly because of the “highly liquid sovereign debt market”.
Referencing the removal of restrictions on sovereign CDS contracts, respondents stressed the importance of a well-functioning sovereign CDS market and that “the current SSR restrictions limited effective hedging, which is important for risk management”.
Short selling of sovereign debt and owning sovereign CDS generally contribute to the healthy functioning of sovereign debt markets, promoting liquidity and facilitating price discovery, according to HMT.
The government will retain sovereign debt and CDS in scope of the Financial Conduct Authority’s (FCA’s) emergency intervention powers for short selling.
As part of these retained powers, the government will require the FCA to set out its approach to using these powers. The government considers that this should provide the market with “greater upfront clarity on the FCA’s use of its emergency powers”. The FCA will consult on this approach in due course.
The UK government has published a draft Statutory Instrument (SI) in parallel to the document illustrating the government’s response to the follow up consultation.
The draft will highlight the key features of the UK’s new short selling regime as a whole, including the government’s position on sovereign debt and CDS.
The government requests any technical comments on the draft SI by 10 January 2024.
It follows the closing of a follow up consultation put forth by HM Treasury (HMT) in July on the Short Selling Regulation (SSR) — a regulatory package that was introduced by the EU and brought onto UK statute following its exit from the EU.
The consultation discussed aspects of the SSR related to sovereign debt and CDS, and was a result of a call for evidence which was issued by HMT in December 2022.
The Treasury received seven responses to the consultation, six from trade associations and one from a standard-setting organisation.
All of the respondents agreed with the analysis of the current SSR requirements as set out in the consultation document.
Several respondents emphasised that, “given the size and liquidity of sovereign debt markets”, they do not see the same need for covering requirements for sovereign debt and CDS as for equity markets.
In discussing removing restrictions on sovereign debt contracts, several responses emphasised that the existing requirements are ‘unnecessary’, particularly because of the “highly liquid sovereign debt market”.
Referencing the removal of restrictions on sovereign CDS contracts, respondents stressed the importance of a well-functioning sovereign CDS market and that “the current SSR restrictions limited effective hedging, which is important for risk management”.
Short selling of sovereign debt and owning sovereign CDS generally contribute to the healthy functioning of sovereign debt markets, promoting liquidity and facilitating price discovery, according to HMT.
The government will retain sovereign debt and CDS in scope of the Financial Conduct Authority’s (FCA’s) emergency intervention powers for short selling.
As part of these retained powers, the government will require the FCA to set out its approach to using these powers. The government considers that this should provide the market with “greater upfront clarity on the FCA’s use of its emergency powers”. The FCA will consult on this approach in due course.
The UK government has published a draft Statutory Instrument (SI) in parallel to the document illustrating the government’s response to the follow up consultation.
The draft will highlight the key features of the UK’s new short selling regime as a whole, including the government’s position on sovereign debt and CDS.
The government requests any technical comments on the draft SI by 10 January 2024.
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