Managed Funds Association urges EU reforms after UK success in short selling regulation adjustments

The Managed Funds Association (MFA) has played a pivotal role in advocating for reforms to short selling regulations, particularly with recent successes in the UK and ongoing efforts in the European Union. MFA’s work underscores the essential function of short selling in supporting market liquidity, price discovery, and transparency, and highlights the need for regulatory frameworks that boost, rather than stifle, capital market efficiency.

In a detailed discussion with Funds Europe, MFA representatives explained how their direct engagement with regulators and policymakers has led to meaningful changes. A notable success was the UK’s adoption of aggregated, anonymised net short position disclosure rules, replacing the previous regime that mandated individual firm disclosures above a certain threshold. MFA’s evidence showed that this approach could encourage broader market participation and improve market functioning. The UK Financial Conduct Authority (FCA) subsequently withdrew a controversial proposal to ‘name and shame’ firms violating short selling rules after MFA raised concerns, signalling the influence of industry dialogue.

The UK reforms, now enshrined in the UK Short Selling Regulations 2024, represent part of a post-Brexit drive to tailor regulatory frameworks more closely to market realities. The new rules require the FCA to publish anonymised aggregated net short positions by issuer, replacing prior requirements. MFA also successfully advocated to adjust reporting thresholds, reducing the cost and administrative burden on firms. The alternative investment industry has welcomed these reforms, with MFA stating that short selling enhances market efficiency, liquidity, and price discovery while helping to detect corporate fraud and abuse, benefiting the UK economy and capital markets.

However, MFA warns that similar reforms are urgently needed in the EU to maintain market competitiveness, particularly given the growing competition from financial hubs like London and New York. The current EU Short Selling Regulation (SSR), which requires individual public disclosure of short positions above 0.5% of issued share capital, is regarded as relatively heavy-handed. MFA’s recent letter to the European Commission calls for targeted reforms, including recalibrating public disclosures to aggregated net short positions, which aligns with the UK model. The association contends that easing these rules could unlock short selling’s benefits in the EU, stimulating investment and improving market functioning.

Critics of short selling argue it is destabilising or speculative, but MFA and independent studies suggest otherwise. Research commissioned by MFA and findings from other bodies, such as Copenhagen Economics and Oliver Wyman, indicate that stringent public disclosures may actually reduce trading volumes, heighten volatility through herding behaviour, and discourage short selling above disclosure thresholds. This can inadvertently constrain market efficiency and capital flow, potentially impacting long-term investment strategies and pension funds’ ability to diversify portfolios.

The European Securities and Markets Authority (ESMA) has also studied the effects of net short position disclosures. Its research found that public disclosure influences investor behaviour, often deterring crossing of disclosure thresholds and potentially reinforcing herd behaviour among short sellers, outcomes that challenge the intent of transparency measures. These complexities underscore the need for a balanced approach to regulation.

Beyond short selling, MFA highlights broader challenges for alternative asset managers in Europe, including the increasing scrutiny of non-bank financial intermediation and the need for regulatory approaches proportionate to the actual risk profiles of these investors. MFA warns that adopting bank-style regulatory requirements for alternative funds could restrict their ability to provide diverse financing to European companies, especially when varied funding sources are crucial for economic resilience.

MFA also emphasises the importance of regulatory frameworks that facilitate pension funds’ access to alternative investments, citing that in the US, pension plans allocate over $600 billion to hedge funds to support retirement outcomes. In Europe, institutional investment in alternatives is substantial, with pension funds investing more than €160 billion and private credit funds providing over €350 billion to businesses. Streamlined reporting requirements and improved data harmonisation within frameworks such as MiFID could reduce operational burdens without compromising oversight, according to MFA.

Further areas of regulatory focus include the Bank of England’s contemplated reforms to the gilt repo market, which MFA supports if well-designed to bolster market resilience without restricting liquidity or access. The association also points to developments such as tokenisation of securities and evolving investor access to alternatives as key considerations for future regulatory agendas.

In sum, MFA’s advocacy and research signal a commitment to fostering capital markets that balance transparency with efficiency, supporting long-term investment and market integrity. The UK’s legislative changes offer a blueprint that the EU could benefit from emulating to ensure its financial markets remain competitive and functional amid a rapidly evolving global landscape.