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22 June, 2018
On 28 May 2018, the Monetary Authority of Singapore (“MAS”) issued new Securities and Futures (Short Selling) Regulations 2018 (“SF(SS)R”) and new regulatory guidelines (“Guidelines”), to enhance transparency on the level of short selling in securities listed on Singapore's approved exchanges. This update outlines the key measures of the new short selling regime in Singapore.
Rules for the regulation of short selling were first proposed by MAS in a consultation paper published on 14 December 2016 (“Consultation Paper”). After considering the feedback received, MAS has now finalised its policy posture on the regulation of short selling in Singapore, and issued the SF(SS)R in conjunction with the Guidelines. These are to be interpreted together with the new Part VIIA of the Securities and Futures Act.
MAS’s Proposals in the Consultation Paper
The Consultation Paper contained MAS’s proposals on the following issues:
- requirements on the specified capital market products which would be subject to the short order marking and short position reporting requirements;
- requirements relating to the disclosure of short sell orders;
- requirements relating to the reporting of short positions;
- reporting by institutional participants with multiple trading desks; and
- reporting by investors with multiple fund managers that have discretionary mandates.
MAS’s Response to Feedback
MAS's response to some of the key issues raised from the feedback received on the Consultation Paper include:
(a) The difference between a short sell order disclosure and short position reporting
It was noted by MAS that some respondents might have confused the purpose of short sell order disclosure and short position reporting. MAS first clarified the difference between a short sell order disclosure and short position reporting.
Short sell order data provides transactional information, which shows the directional interest of the market on a trading day. In contrast, short position data provides positional information, which shows the extent of outstanding short interests in a particular stock and provides insight to the level of risk involved in shorting a particular stock. From MAS’s perspective, short sell order disclosure and short position reporting provide different informational value.
Some respondents had queried whether the Singapore Exchange’s systems could be used to derive positional information, which would relieve market participants from the need to report short positions to MAS. In response to this, MAS clarified that the short position reporting regime required a position holder to report the amount of short interest held, and since some of this interest might be held through omnibus accounts (where positions are commingled with that of other investors), deriving positional information from existing systems might not be accurate. Additionally, such a requirement would be consistent with both the requirement for substantial shareholders of listed companies to disclose their (long) interests in a stock and the short position reporting regimes of other jurisdictions.
MAS also stated that the regime would avoid the need to create a dependency on market infrastructure, so that changes to existing systems and processes would not likely result in any disruption to the reporting of short interests. However, recognising that the new regime might create additional reporting burdens on market participants, MAS said it would make certain changes to what was originally proposed in the Consultation Paper (further explained below).
(b) Scope of specified capital markets products
It is envisaged that the following capital markets products would be prescribed as specified capital markets products within the new SF(SS)R, so as to be subject to the short selling requirements:
- any share (including both ordinary and preference shares) of a corporation that is listed on an approved exchange (including all primary and secondary listings);
- any unit in a business trust that is listed on an approved exchange; and
- any unit in a real estate investment trust.
However, the following products would be excluded from the scope of specified capital markets products:
- bonds;
- exchange traded funds; and
- contracts for difference.
(c) Disclosure of short sell orders
Under the new section 137ZJ of the Securities and Futures Act that would be brought into effect, a person (“A”) who places a short sell order on an approved exchange must, before or at the time of the short sell order, disclose to the approved exchange that the order is a short sell order. In the event the short sell order is placed through another person (“B”) (who may for instance be a broker), A must inform B that the order is a short sell order so that B would, before or at the time of the short sell order, disclose to the approved exchange that the order is a short sell order. This would be further elaborated on in the Guidelines.
MAS also said it would exempt designated market makers and registered market makers from the requirement to disclose short sell orders in respect of their market making activities. However, a short sell order submitted by a market maker which is not intended for the purposes of market making would still be subject to the short sell order disclosure requirements.
(d) Reporting of short positions
In relation to the reporting of short positions, MAS had in the Consultation Paper initially intended to define the reporting threshold as the lower of 0.05% or S$1,000,000 of issued shares. While respondents generally recognised the benefits of enhanced transparency, some had concerns that the proposed threshold for reporting short positions was too low, and would create an undue reporting burden.
In response, MAS indicated that it would adjust the reporting threshold to the lower of 0.2% of the total issued shares/units, or S$2,000,000 in aggregate value of issued shares/units. MAS also stated that, going forward, this threshold might be further calibrated, after actual short position data is collected.
Respondents also had mixed views on whether market makers ought to be exempt from short position reporting requirements. To this, MAS stated that both designated market makers and registered market makers would be required to report short positions (if the position reaches the reporting threshold), in order to contribute to the completeness of aggregate data on short positions, since short positions incurred by a market maker at the end of the position day could represent a directional interest. This follows the position in other markets such as Australia, Hong Kong, and Japan, which require market makers to report on short positions.
(e) Flexibility for institutional participants to report at trading desk level
Recognising that institutional participants have varying arrangements and practices (in line with the investment decisions), MAS had proposed in the Consultation Paper, the flexibility to report short positions either at the trading desk level or legal entity level, depending on their organisational structure and operational practices. This proposal was generally welcomed by respondents, although some respondents raised concerns that aggregating short positions at the highest possible level where trading decisions share the same influence may be restrictive, particularly where a trading desk maintains multiple trading books.
Taking into consideration the concerns raised by respondents, MAS had revised the definition of “trading desk” in the SF(SS)R, such that a trading desk with multiple trading books can either report its net short position across trading books, or net short positions of individual trading books. MAS also underscored the importance of firms taking a consistent approach in reporting, and that all short positions are reported, to prevent distortion in the informational value in trend analysis of the data.
It should also be noted that paragraph 5.4 of the Guidelines would allow for an exception to be made where the change in approach is driven by a material change in how investment decisions are made within the firm, which would in turn warrant a change in the level of reporting. Any change in approach should be effected promptly (i.e. within three months) after the material change in investment decision-making.
(f) Flexibility for investors with multiple fund managers that have discretionary mandates to report
In the Consultation Paper, MAS also addressed the situation where an investor had different independent fund managers managing funds for him, under different segregated accounts with separate discretionary mandates. MAS had proposed to allow the investor to report his short sell orders and aggregate short positions at his level, or alternatively, for the investor to elect to report short orders or positions at the fund manager's level (given that the trading decisions might be made by the fund manager independently of the investor).
Respondents were generally receptive to this proposal, although one respondent suggested that fund managers should be required to report short positions for both discretionary and non-discretionary funds on behalf of individual investors.
Consistent with the approach for institutional participants, namely to provide flexibility for investors to decide how best to set up reporting arrangements, MAS has taken the view that it would be overly restrictive if fund managers were mandated to report all short positions on behalf of investors, regardless of who makes the trading decision. As such, MAS has decided to maintain the position that all short positions are to be reported if an investor chooses to report at the discretionary fund manager level. All reporting must also be done on a consistent basis, so as not to distort the informational value in trend analysis of the data.
(g) Flexibility to report at trust level
Responding to feedback, MAS also indicated that it would include a new provision allowing flexibility to report at the trust level. This was in response to concerns from some respondents regarding the challenges which trustees might face.
Some respondents took the view that the obligation to report short positions ought not to lie with the trustee, since the trustee would not be privy to investment decisions taken by the fund manager. Another respondent suggested that the trustee be given the option to either report aggregate short positions at the trustee level or at the individual trust level.
In response, MAS said it recognised the fact that trustees might not always have timely knowledge of trades executed on its behalf (despite being the legal owner of the trust assets). As such, MAS would allow a trustee to authorise a third party or reporting agent, such as the fund manager, to report on its behalf.
Notwithstanding this, trustees would still have the flexibility to report net short reports at the legal entity level or at the individual trust level. Trustees who opt to report (either directly to MAS or through its fund manager) short positions at individual trust level would have to report all short positions.
Again, MAS reiterated that trustees would have to adopt a consistent basis of reporting and not switch back and forth between reporting at the trustee and trust level, in order to prevent distortion in the informational value in trend analysis of the data.
Implementation Timeline
The new SF(SS)R and Guidelines have already been published, to provide early certainty of the reporting requirements and to aid the industry in preparing for the reporting regime. The Short Position Reporting System has also already been made available online for market participants to familiarise themselves with the interface.
The new short selling regime will take effect on 1 October 2018.
A copy of MAS's response can be accessed here.
