Kai Loon Loh
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We discuss below the key features of the Short Selling Regulations, as well as important aspects of the Short Selling Guidelines and MAS Response.
The Short Selling Regulations will take effect on 1 October 2018.
This should come as no surprise because the MAS has already indicated that the various amendments to the Securities and Futures Act, Chapter 289 of Singapore (the "SFA") will come into force in Q3 this year.
Accordingly, the Securities and Futures (Amendment) Act 2017 (Commencement) Notification 2018 provides that the new Part VIIA (which contains the short selling rules in the new SFA) will also come into operation on 1 October 2018.
The key obligation in relation to short selling relates to disclosure and reporting.
What products are covered?
The short selling rules apply to specified capital markets products which is defined to mean:
Accordingly, other types of securities, for example, bonds and exchange-traded funds are excluded. In addition, derivatives (e.g. options) over a specified capital markets product are currently excluded from the determination of a short sell order or short position.
There is an interesting question as to whether stapled securities are covered by the Short Selling Regulations. For example, if a stapled security consists of a unit in a REIT and a unit in a BT, one would expect the stapled security to be caught by the short selling rules. However, if the stapled security consists of a share and a note, then it becomes less clear-cut.
The reporting obligation for short positions is subject to a threshold. This is defined to be the lower of:
The 0.2% level is similar to the EU position which requires net short positions of 0.2% and above to be disclosed to the relevant competent authority. However, market participants should analyse how to calculate the 0.2% threshold because each regime will have its own rules regarding what types of interest are counted (and what are not).
Both designated market makers and registered market makers ("market makers") will be exempt from disclosing short sell orders, so as not to impede the efficiency of their market making activities. However, the exemption applies only to orders for the purpose of market making.
On the other hand, market makers are not exempt from reporting short positions. The same thresholds above apply. This is because, unlike short sell orders, holding short positions could represent a directional interest on the part of the market maker.
A person who is obliged to disclose a short sell order or report short positions may delegate the disclosure/reporting obligation to an agent.
Disclosure of a short sell order can be delegated to a broker if a person ("A") is placing the order through the broker. In other words, A will discharge its disclosure obligation by informing the broker that the order is a short sell order. The broker is then obliged to disclose the fact to the relevant exchange. This is consistent with the SGX Listing Rules which currently require all sell orders to be marked to indicate whether it is a short sell order or otherwise, and a trading member must not enter a sell order if a customer has not indicated whether a sell order is a short sell order or a normal sell order.
On the other hand, the obligation to report a short position is less amenable to delegation. This is because the legal duty to report lies with the person who has the short position. The Short Selling Guidelines make this very clear. So, in the case of a trust, the obligation to report lies with the trustee and not the manager (the person with authority to direct the sale) or beneficiaries (the persons on whose behalf the position was taken). As such, if a trustee delegates its obligation to report to a third party (which may be an individual or corporation), it will have to ensure that such third party is provided the relevant information in a timely manner so as to procure compliance.
The Short Selling Regulations also provide flexibility to report at the trading desk level. In other words, it recognises that certain firms may find aggregation of data across all trading desks operationally burdensome and, if so, such firms may elect to disclose all short sell orders and report all short positions for each trading desk separately.
However, the firm should ensure that there is no double counting and its adopted approach should be applied consistently. Any change in approach should be effected promptly (i.e. within 3 months) after the relevant change in investment decision-making that resulted in such change in approach. The Short Selling Guidelines also recognise the possibility of disclosing short sell orders at trading desk level and reporting short positions at legal entity level – however, this will depend on the individual firm's internal arrangements and operational processes.
If an investor uses multiple fund managers and each holds a discretionary portfolio, the Short Selling Regulations also contemplate flexibility to report at the fund manager level. This is on the basis that it may be impracticable for the investor to aggregate data across all fund managers but, at the fund manager level, the fund manager ought to be able to report for the investor.
Similarly, if a trustee acts as a trustee for multiple trusts which are managed by one or more fund managers, the Short Selling Regulations also contemplate flexibility to report at the trust level. Unlike the investor scenario, a fund manager should not aggregate across the trusts it manages when it determines a short sell order or a short position.
The Short Selling Regulations will come into force in 4 months so market participants should start familiarising themselves with the content of the rules and the exemptions, and consider how it will comply with the disclosure and reporting obligations.
In particular, there will be various action points and implementation decision-making processes, including:
If you would like to discuss any aspect of the Short Selling Regulations or require advice in this regard, feel free to reach out to any of your Ashurst contacts.
This publication is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to. Readers should take legal advice before applying the information contained in this publication to specific issues or transactions.
T +65 6334 2880
31 May 2018