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14 June, 2018
On 28 May 2018, the Monetary Authority of Singapore ("MAS") published its Response to Feedback Received on Consultation Paper on Regulations for Short Selling (the "MAS Response"), the Securities and Futures (Short Selling) Regulations 2018 (the "Short Selling Regulations") and the Guidelines on the Regulation of Short Selling dated 28 May 2018 (the "Short Selling Guidelines").
We discuss below the key features of the Short Selling Regulations, as well as important aspects of the Short Selling Guidelines and MAS Response.
Implementation timeline
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.
Disclosure of short sell orders and reporting of short positions
The key obligation in relation to short selling relates to disclosure and reporting.
Short sell orders: a person who makes a short sell order on an approved exchange will be required to disclose the short sell order to the approved exchange. If a person owns some but not the full amount of securities to be sold, then it will be required to split the sell order into two, one that is not marked as a short sell order (in relation to the securities it owns) and the other marked as a short sell order (in relation to the balance it does not own).
Short position: a person whose short position exceeds the short position threshold will be required to report its short position to the MAS within two business days after the short position day, by lodging a Short Position Reporting Form (the "SPRF") through the Short Position Reporting System (the "SPRS") accessed through the MAS website.
What products are covered?
The short selling rules apply to specified capital markets products which is defined to mean:
- shares (both primary and secondary listings and whether ordinary or preference shares);
- units in a business trust ("BT"); and
- units in a real estate investment trust ("REIT").
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.
Short position threshold
The reporting obligation for short positions is subject to a threshold. This is defined to be the lower of:
- 0.2% of the total issued shares/units; and
- S$2 million in aggregate value of the issued shares/units.
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).
Market maker exemption
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.
Delegation
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.
Trading desk reporting
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.
Fund Manager and Trustee reporting
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.
Conclusions
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:
- working out when is a sell order a "short sell order" and how to determine "short positions";
- working out how to perform the relevant calculations to determine whether the short position threshold has been breached;
- applying to the MAS to be registered as an account holder of the SPRS;
- having in place the operational processes to monitor and disclose short sell orders/report short positions in a timely fashion;
- considering whether to disclose/report at a trading desk level, fund manager level or trust level (as applicable) or on an aggregate basis; and
- setting up the infrastructure to report short positions (i.e. creating the necessary user accounts (e.g. how many, at what level, etc.) , familiarising with the functionalities of the SPRS, making one or more test submissions of the SPRF, etc.).
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.
For further information, please contact:
Kai Loon Loh, Ashurst
kailoon.loh@ashurst-adtlaw.com
