Gensler is on the move again- this time it is short selling.

Post by Caleb Woo, Head of Client Success and Suat Kheng, Business Analyst – Regulations

In the case of the Securities and Exchange Commission, Chairman Gary Gensler is becoming a lot vocal post his announcement to review current regulations, proposing regulatory changes in the beneficiary ownership and shareholding disclosure arena and that seems to be gathering a lot of momentum. 

One of the underlying trends that continues to make headway globally is protectionism as the momentum of globalization subsides, where it was all about opening up economies and industries. To the extent, it is almost a total reversal of what was being done. The reason is that governments and their respective regulators are now fully aware of the need to protect national key assets and the only way is really to require any person or organisation to adhere to respective disclosure regulations and drive transparency of ownership – basically know who owns what asset and why. 

What has followed is notable changes with SEC leading the way. Our article late last year Activists could face less time to report large stakes in U.S highlights U.S. regulatory reporting having its first major change with respect to shareholding disclosure rules that were more than five decades old as the first change was SEC considering to speed up the deadline for investors to alert the market when they amass an ownership stake of more than 5% of a company’s stock. 

More recently, 25 February 2022, Gensler announced a new rule that brought with it a raft of changes in respect to Short Selling regulatory disclosure, a radical move. 

Investors, notably hedge funds, notably the users of Short Selling, are being targeted and are now required to share more information with regulators and the public. Post the 2008 GFC and perhaps the saga of Bill Hwang’s Archegos Capital and its impact on capital markets got regulators thinking too about the need for greater disclosure and not being blindsided as investors looking to utilise different strategies to avert the markets eye. 

One conclusion from the recent saga can be said that the disclosure of swaps are likely to be the next target on the disclosure agenda whereby the ultimate owner of the underlying security and not the swap issuer would be required to disclose, that would mean swaps would be included as one of the instruments to be disclosed.

The new rules Rule 13f-2 are a radical change from current practice where institutions do not need to disclose any Short Selling to SEC, their only requirement is to report total short positions to Financial Industry Regulatory Authority (FINRA) that acts as an independent, non-governmental organization that writes and enforces the rules governing registered brokers and broker-dealer firms in the United States. The prior requirement was to report total short positions no later than the second business day after the reporting settlement date (which is the 15th and last day of each month).

The new rule requires institutional money managers to report short selling to the SEC within 14 days after any month in which their gross position was larger than $10mn, or 2.5 per cent of the shares outstanding if that is smaller. The idea is that the SEC would provide information to the market the aggregate data about shorts on individual companies. Brokers would also have to collect and report data on share purchases that are being used to cover shorts.

The SEC would then aggregate all the data about large short positions, including daily short sale activity data, and make it available to the public for each individual security. 

This information would supplement the short interest data that is currently available, providing the public and market participants with more visibility into the activity of large short sellers.

The new proposed Short Selling disclosure rules require disclosures to be made to the SEC based on the following:-

  • Gross short position in the equity security of a listed issuer of US$10 million or more at the end of any settlement date during the calendar month, or 
  • The monthly average gross short position of 2.5 percent or more of the number of shares outstanding in the equity security, or
  • Gross short position in the equity security of an unlisted issuer of US$500,000 or more at the close of any settlement date during the calendar month


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