FCA Handbook - SSR 3 Covering requirements

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Rules

Guidance

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SSR 3.1 Application

The rules in this chapter apply to a person entering into a short sale of an admitted share anywhere in the world:

(1) whether the person is domiciled or established within the United Kingdom or in a third country; and
(2) regardless of:
1. (a) where the short sale takes place; and
2. (b) whether the short sale takes place on or outside a trading venue.

The rules in this chapter do not apply in respect of an admitted share for which:

(1) the FCA has disapplied these rules in respect of that admitted share in accordance with SSR 4; or
(2) the market maker exemption or stabilisation exemption under SSR 5 applies to market making activities carried out by a person in respect of that admitted share.

The requirement to cover short sales of admitted shares in SSR 3.3.1R relates only to admitted shares. Transactions in instruments which give claims as to as yet unissued shares such as subscription rights and convertible bonds, for example performed as part of a capital increase, are not subject to the covering requirements in this chapter.

For the purposes of SSR, the covering requirements in this chapter do not apply to short sales of global depository receipts, American depository receipts or ETFs as they are not shares.

The admitted shares in respect of which the rules and guidance in this chapter apply are identified on the reportable shares list, which is updated in accordance with SSR 4.

Guidance on the meaning of short sale is contained in SSR 2.12.

SSR 3.2 Purpose

The purpose of this chapter is to set out rules made in accordance with regulation 5(2) of the Short Selling Regulations 2025:

(1) requiring a person entering into a short sale of an admitted share to make arrangements, such as borrowing the admitted share or entering into an agreement or arrangement to borrow the admitted share, to ensure or create a reasonable expectation that settlement of those transactions can be effected when due; and
(2) about the type or features of an agreement or arrangement that satisfy such a requirement.

SSR 3.3 Arrangements for covering short sales so settlement can be effected when due

A person may enter into a short sale of an admitted share only where one of the following conditions is fulfilled:

(1) the person has:
1. (a) borrowed the admitted share; or
2. (b) made alternative provisions resulting in a similar legal effect so that settlement of the short sale can be effected when due;
(2) the person:
1. (a) has entered into an agreement to borrow the admitted share; or
2. (b) has another absolutely enforceable claim under contract or property law to be transferred ownership of a corresponding number of securities of the same class so that settlement of the short sale can be effected when it is due; or
(3) the person has an arrangement with a third party, as defined in SSR 3.5.7R, under which that third party has confirmed that:
1. (a) the admitted share has been located; and
2. (b) the third party has taken measures in relation to other third parties necessary for the person to have a reasonable expectation that settlement of the short sale can be effected when it is due.

Persons carrying out the short sale should fulfil the conditions for the agreements or arrangements in SSR 3.3.1R themselves, which may involve the person entering into an agreement or arrangement with another person within the same group. SSR 3.3.1R cannot be complied with by a person relying on an agreement or arrangement entered into by another person within the same group.

SSR 3.4 Arrangements to borrow and other arrangements under SSR 3.3.1R(2)

For the purposes of SSR 3.3.1R(2), an agreement to borrow or other enforceable claim must be any of the following types of agreement, contract or claim, which are legally binding for the duration of the short sale:

(1) futures and swap contracts:
1. (a) leading to a physical settlement of the relevant admitted shares;
2. (b) covering at least the number of admitted shares proposed to be sold short;
3. (c) entered into prior to, or at the same time as, the short sale; and
4. (d) specifying a delivery or expiration date so that settlement of the short sale can be effected when it is due;
(2) options contracts:
1. (a) leading to a physical settlement of the relevant admitted shares;
2. (b) covering at least the number of admitted shares proposed to be sold short;
3. (c) entered into prior to, or at the same time as, the short sale; and
4. (d) specifying an expiration date so that settlement of the short sale can be effected when it is due;
(3) repurchase agreements:
1. (a) covering at least the number of admitted shares proposed to be sold short;
2. (b) entered into prior to, or at the same time as, the short sale; and
3. (c) specifying a repurchase date so that settlement of the short sale can be effected when it is due;
(4) standing agreements or rolling facilities:
1. (a) entered into prior to, or at the same time as, the short sale, of a predefined amount of specifically identified admitted shares;
2. (b) for the duration of the short sale covering at least the number of admitted shares proposed to be sold short; and
3. (c) specifying a delivery or execution date so that settlement of the short sale can be effected when it is due.
(5) agreements relating to subscription rights:
1. (a) where the person is already in possession, or by the time of the short sale will be in possession, of rights to subscribe for new admitted shares of the same company and of the same class;
2. (b) covering at least the number of admitted shares proposed to be sold short; and
3. (c) provided that the person is entitled to receive the admitted shares on or before settlement of the short sale so that settlement of the short sale can be effected when it is due; or
(6) other claims or agreements leading to delivery of the shares which:
1. (a) are agreements or claims which cover at least the number of admitted shares proposed to be sold short;
2. (b) are entered into prior to, or at the same time as, the short sale; and
3. (c) specify a delivery or execution date that ensures settlement of the short sale can be effected when it is due.

(1) Claims to shares that are not yet issued (for example, subscription rights, convertible bonds and placements) may only cover a short sale if the newly admitted shares will be made available so that settlement of the short sale can be effected when due, for example where the concerned rights or convertible bonds can be converted into admitted shares that would be made available so that settlement of the short sale can be effected when it is due.
(2) Rights to subscribe for new admitted shares cannot be used to cover a short sale in accordance with SSR 3.4.1R(5) where, at the time when the short sale is entered into, there is uncertainty as to whether the new admitted shares subscribed for will be available for settlement of the short sale in due time. That would be the case at least where:
1. (a) the final details of the capital increase are not yet known;
2. (b) it is not certain that the new admitted shares resulting from the capital increase are fungible with the existing admitted shares sold short;
3. (c) there is uncertainty as to whether a sufficient number of new admitted shares will be allocated to the subscriber that undertakes the short sale of the existing admitted shares; or
4. (d) the delivery of the new admitted shares in the context of the concerned capital increase cannot be effective before or on the date of settlement of the short sale of the existing admitted shares.

Guidance on rolling repurchase agreements

In relation to SSR 3.4.1R(3), the resulting short positions may exist well after the short sale has been settled. Nothing precludes the rolling of the repurchase agreement after the short sales have been executed and settled.

SSR 3.5 Arrangements with third parties under SSR 3.3.1R(3)

The following arrangements are required to meet the conditions of SSR 3.3.1R(3):

Standard Locate Arrangements

(1) Where the settlement of the short sale is not undertaken on the same day as the proposed short sale, and where (3) does not apply, a third party must, before the short sale is entered into, have given to the person entering into the short sale:
1. (a) a locate confirmation confirming that it considers that it can make the admitted shares available for settlement in due time taking into account the amount of the possible sale and market conditions, indicating the period for which the admitted share is located; and
2. (b) a put on hold confirmation confirming that it has at least put on hold the requested number of admitted shares for that person;
Standard Same Day Locate Arrangements
(2) Where settlement of the short sale is to be undertaken on the same day as the proposed short sale, each of the following is required:
1. (a) subject to SSR 3.5.2R, a request for confirmation must be made by the person entering into the short sale to the third party which states that person’s intention that the short sale will be covered by purchases during the day on which the short sale takes place;
2. (b) the third party must, prior to the short sale being entered into, have given to the person entering into the short sale:
  1. (i) a locate confirmation that confirming that the third party considers that it can make the admitted shares available for settlement in due time taking into account the amount of the possible sale and market conditions, indicating the period for which the admitted shares are located; and
  2. (ii) an easy to borrow or purchase confirmation confirming that either:
    1. (A) the admitted share is easy to borrow or purchase in the relevant quantity taking into account the market conditions and other information available to that third party on the supply of the admitted shares; or
    2. (B) in absence of a confirmation in (A), the third party has at least put on hold the requested number of admitted shares for the person; and
3. (c) the person proposing to enter into the short sale must have given an undertaking to the third party:
  1. (i) to monitor the amount of the short sale not covered by purchases; and
  2. (ii) that, in the event that executed short sales are not covered by purchases in the same day, the person will promptly send an instruction to the third party to procure the admitted shares to cover the short sale so that settlement of the short sale can be effected when it is due.
Easy to borrow or purchase arrangements
(3) Where the person is entering into a short sale of admitted shares that meet the liquidity requirements established in Article 1 of Commission Delegated Regulation (EU) No 1017/567 or successor legislation, or of other admitted shares that are included in the FTSE 100 and are the underlying financial instrument for a derivative contract admitted to trading on a trading venue, the following is required:
1. (a) the third party must have, prior to the short sale being entered into, given to that person:
  1. (i) a locate confirmation confirming that the third party considers that it can make the admitted shares available for settlement in due time taking into account the amount of the possible sale and market conditions, indicating the period for which the admitted share is located; and
  2. (ii) an easy to borrow or purchase confirmation confirming that either:
    1. (A) the admitted share is easy to borrow or purchase in the relevant quantity taking into account the market conditions and other information available to that third party on the supply of the admitted shares; or
    2. (B) in absence of a confirmation in (A), the third party has at least put on hold the requested number of admitted shares for the person; and
2. (b) the person proposing to enter into the short sale must have given an undertaking to the third party that, when executed short sales will not be covered by purchases or borrowing, a prompt instruction will be sent by the person instructing the third party to procure the admitted shares to cover the short sale so that settlement of the short sale can be effected when it is due.

Modification of the requirement in SSR 3.5.1R(2)(a) to make a request for confirmation where a put on hold has been obtained

A request for confirmation under SSR 3.5.1R(2)(a) is not required where a person has obtained from a third party a put on hold confirmation under SSR 3.5.1R(2)(b)(ii)(B).

Guidance on using an easy to borrow or purchase list as an easy to borrow or purchase confirmation

(1) An easy to borrow or purchase list provided by a third party would only be considered an easy to borrow or purchase confirmation under SSR 3.5.1R(2)(b)(ii) or (3)(a)(ii) where, for each admitted share in the list, it provides an assessment of:
1. (a) the amount of the admitted share that is available; and
2. (b) the market conditions at the time of providing the list, including the liquidity of the admitted share concerned, and any other information available on the supply of the admitted share.
(2) For the list referred to in (1) to be used as an easy to borrow or purchase confirmation for subsequent short sales, the assessment in (1) has to be reviewed to consider the relevant quantity and any change in the market conditions.

Third parties should update the market, such as updating the easy to borrow or purchase list referenced in SSR 3.5.3G, if there is a significant change to the availability of shares previously notified, where the changes mean that the third party may be less likely than previously implied to be able to obtain and deliver those shares for the purposes of covering a transaction under SSR 3.3.1R(3).

For the purposes of SSR 3.3.1R(3), the arrangements in SSR 3.5.1R are less appropriate for illiquid shares, given it may not be reasonable to rely on such arrangements for illiquid shares which may be more difficult to obtain.

For the purposes of SSR 3.5.1R(3), the FCA treats the FTSE 100 index as the main national equity index of the UK.

Third parties

For the purpose of SSR 3.3.1R(3), the third party must be one of the following:

(1) an investment firm which meets the requirements set out in SSR 3.5.8R;
(2) a central counterparty which clears the relevant admitted shares;
(3) a securities settlement system as defined under the Financial Markets and Insolvency (Settlement Finality) Regulations 1999 (SI 1999/2979) which settles payments in respect of the relevant admitted shares;
(4) a central bank that accepts the relevant admitted shares as collateral or conducts open market or repurchase transactions in relation to the relevant admitted shares;
(5) any other person who is subject to authorisation or registration requirements in accordance with the Act and meets the requirements set out in SSR 3.5.8R;
(6) a person established in a third country who is authorised or registered and is subject to supervision by an authority in that third country and who meets the requirements set out in SSR 3.5.8R, provided that the third country authority is a party to an appropriate cooperation arrangement concerning exchange of information with the FCA;

For the purposes of SSR 3.5.7R(1), (5) and (6), the third party must be one that:

(1) participates in the management of borrowing or purchasing of relevant admitted shares;
(2) provides evidence of such participation; and
(3) is able, on request, to provide evidence, including statistical evidence, of its ability to deliver, or process the delivery of, admitted shares on the dates it commits to do so to its counterparties.

SSR 3.6 Record keeping

A person who enters into the short sale of an admitted share must ensure that evidence of the existence of:

(1) an agreement, contract or claim under SSR 3.3.1R(2); or
(2) arrangements, confirmations and instructions under SSR 3.3.1R(3),
is provided in a durable medium and kept unaltered, accessible and retrievable for 5 years from the date the borrowing or locate arrangements are entered into.

For the purposes of SSR 3.6.1R, telephone call registrations are considered an adequate durable medium.