Following extensive industry feedback on the draft conduct standard regarding the reporting and disclosure of short sales, published in March 2023 (First Draft Conduct Standard), the Financial Sector Conduct Authority (FSCA) has engaged with targeted stakeholders and published a revised version (New Draft Conduct Standard) for a second round of public consultation. Comments should be submitted until 19 May 2025.
The 2008 global financial crisis highlighted the risks that short sale transactions pose to financial institutions and the broader market stability, particularly in times of declining share prices. These risks include market abuse, disorderly trading, and settlement failures. In response, several jurisdictions imposed temporary bans on short sales in certain sectors during the crisis. Since then, international principles and best practices have been developed, notably by the International Organisation of Securities Commissions' (IOSCO) Task Force on Short Sales.
In line with international best practices, the New Draft Conduct Standard seeks to address the current regulatory gap by introducing a formal framework for the reporting and disclosure of short sales in South Africa. The New Draft Conduct Standard will apply to all financial institutions engaging in short sale activity and explicitly prohibits uncovered (naked) short sales. The FSCA believes that transparent short sale reporting will enhance market integrity by helping to track the level of short selling in specific securities; provide insight into share price movements; offer early warning signals of a potentially overvalued individual securities; and build investor confidence by reducing uncertainty.
Positional reporting
Due to practical challenges and the absence of empowering provisions, the FSCA is introducing a phased approach to the adoption of the short sale reporting and disclosure framework.
In the first phase, only positional reporting of short sales data will be required. Transactional reporting has been removed from the ambit of the New Draft Conduct Standard. Comments received on the First Draft Conduct Standard noted that authorised users responsible for executing trades typically do not have insight into which transactions relate to a short sale, as this information is not disclosed to them by clients. The FSCA aims to find a solution by potentially proposing amendments to the Financial Markets Act, 2012 (FMA), allowing for transactional short sale requirements to be imposed directly on clients.
Financial institutions conducting short sale activities will be required to report open short sale positions to a licensed trade repository daily, unless the positions fall below thresholds still to be determined.
Strate has been approved by the FSCA as the first licensed trade repository in terms of section 56 of the FMA. It is expected that, once the New Draft Conduct Standard comes into force, financial institutions will be mandated to report short sale positions to Strate.
Where financial institutions do not have the necessary information to determine open short sale positions, they must make a reasonably practical effort to obtain the data. An exception is provided where this is not possible.
Positional reporting offers the market valuable insights into the level of bearish sentiment in listed securities at any given time. Changes in reported short positions may help investors assess whether a security is undervalued or overvalued. Overall, enhanced positional reporting is expected to improve market transparency and efficiency, thereby strengthening trust in South Africa's financial markets.
Public disclosure
Once positional short sale data is reported to the trade repository, the repository must publicly disclose aggregated data on its website within one business day of receipt.
The disclosure will include the total open short positions in a specific security, aggregated across all financial institutions, as well as the percentage of issued shares represented by those open short positions.
Enhanced transparency of short sales offers significant informational benefits for the market, which are expected to outweigh the associated compliance costs. The measures contemplated in the New Draft Conduct Standard aim to discourage aggressive, large-scale short sales that could disrupt orderly markets or lead to market abuse. Additionally, the early warning signals of a build-up in short positions will assist regulators in identifying and addressing potentially abusive behaviour more effectively.
Webber Wentzel will continue to monitor the progress of the conduct standard and keep clients informed of developments impacting South Africa's capital markets.
