Britain’s financial watchdog has eased restrictions on hedge funds after relaxing rules on short selling and reducing management and reporting requirements.
The move marks a major step change in how the Financial Conduct Authority regulates investors who bet on the value of companies, and comes as part of a broader UK effort to cut out bureaucracy.
The FCA, which oversees Britain’s financial services firms and markets, announced on Thursday that the new framework will provide “clearer and simpler” rules on short selling.
Short selling (a core element of many hedge fund strategies) involves an investor betting with the intention of profiting from a decline in the value of a particular stock or security.
The practice has often been criticized for destabilizing markets, accelerating sharp declines during periods of extreme volatility, and leaving vulnerable companies in distress. However, the FCA said short seller laws play an important role in promoting price discovery, liquidity and risk management in financial markets.
Under the new framework, which comes into force on July 13, the FCA will publish aggregate data showing the overall size of each company’s net short positions, a significant departure from current rules that identify individual short sellers.
The FCA’s new anonymized aggregate disclosure model eliminates what the industry sees as the reputational and strategic risks faced by short sellers by removing the requirement to publish the names of individual short sellers. This gives hedge funds more freedom to operate without exposing their strategies and causing market repulsions, copycat trades, and short squeezes.
The FCA said UK investors covered by the regime would benefit from a “more workable timetable” for short position disclosures, reducing compliance costs for the UK hedge fund industry, particularly smaller start-up companies.
“These changes will give firms clearer rules and reduce their administrative burden, while ensuring they have the information they need to keep markets fair,” said John Relleen, director of infrastructure and exchanges at the FCA.
“This is smarter regulatory enforcement.”
Philip Chapple, chief operating officer at London-based Monterone Partners, said the new rules would make the UK a more attractive market for investment activity by removing transparency requirements that had previously been a problem for large operators.
“This was achieved while ensuring the transparency necessary for the FCA to monitor its activities and markets,” Chapple told CNBC.
Gillian Flores, chief advocacy officer at the Managed Funds Association, the trade body for the global alternative asset management industry, said the tightened rules would strengthen the UK’s position as a global financial centre.
Flores also called on the EU to “act quickly” to update its own short sale disclosure regime to improve competitiveness.
