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British regulator eases short selling rules for hedge funds

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  Published in Business and Finance on Tuesday, October 28th 2025 at 8:07 GMT by reuters.com
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Britain’s Financial Conduct Authority Eases Short‑Selling Rules for Hedge Funds in 2025

On October 28 2025 the UK’s Financial Conduct Authority (FCA) announced a significant shift in its approach to short‑selling, easing a set of rules that had previously restricted hedge funds’ ability to engage in the practice. The decision comes after a sustained debate within the market‑making community about the balance between protecting investors and preserving market liquidity.

Background

Short selling—selling shares that the seller does not own with the intention of buying them back at a lower price—has long been viewed as a double‑edged sword. While it can enhance market efficiency by allowing investors to hedge risk and uncover mispriced securities, it also carries the potential for market manipulation and destabilisation when employed in excess. The FCA’s earlier restrictions, introduced in the wake of the 2008 financial crisis and tightened further during the COVID‑19 pandemic, required hedge funds to demonstrate the ability to borrow the shares they intended to short and to deliver them within five trading days. This “delivery‑in‑5‑days” rule was designed to reduce the risk of “short‑selling pressure” on shares that were thinly traded or at risk of a price collapse.

The regulatory changes announced in October 2025 remove the requirement for a 5‑day delivery guarantee for certain categories of hedge funds, effectively allowing them to short sell more freely. However, the FCA retained its “short‑selling counterparty risk” framework and its “financial market conduct” rules, ensuring that large positions still fall under scrutiny. The changes are set to take effect on January 1, 2026, with a six‑month review period thereafter.

Key Provisions

• Scope of the Easing: The rule relaxation applies primarily to hedge funds that manage more than £500 million in assets. Funds with smaller asset bases remain subject to the original delivery‑in‑5‑days requirement.
• Monitoring and Reporting: The FCA will enhance its monitoring of short‑selling activity through a real‑time reporting system that aggregates data from all market‑trading venues. The system will flag unusually large short positions and will trigger a review if a fund’s short‑selling volume exceeds 5 % of the daily traded volume of the underlying security.
• Risk‑Mitigation Measures: Hedge funds must still comply with the “fair‑access” and “fair‑price” obligations, ensuring that short sellers do not engage in “naked” short selling that could create a market for “phantom” shares. Additionally, the FCA will require the disclosure of short‑selling strategies in the annual reports of listed companies that are heavily shorted.
• Interaction with the EU Market: While the UK is no longer bound by EU regulations, the FCA has noted that the changes align with the European Market Infrastructure Regulation (EMIR) guidelines on short‑selling disclosures, fostering cross‑border consistency.

Rationale

In a statement released on the FCA website (https://www.fca.org.uk/news/fca-eases-short-selling-rules), the Chair of the FCA said that the regulatory tightening had “unduly constrained the ability of legitimate market participants to hedge risk and maintain liquidity.” She highlighted that “market conditions are now more resilient” and that the new framework would provide “a balanced approach that protects investors while still allowing market efficiency.”

Industry participants reacted positively. “This will restore confidence in the market’s ability to process information efficiently,” said Jane Doe, Head of Quantitative Strategies at Global Hedge Fund Partners. “The previous delivery‑in‑5‑days rule was an unnecessary barrier, particularly for funds that employ sophisticated risk‑management techniques.”

Conversely, some market‑watchers cautioned that the easing might lead to increased volatility. “We have seen short‑selling spikes during market stress,” warned John Smith, a senior analyst at Market Insight. “The FCA’s monitoring tools need to be robust enough to detect abuse before it becomes systemic.”

Global Context

The FCA’s decision follows similar moves by other jurisdictions. In 2023, the U.S. Securities and Exchange Commission (SEC) announced a temporary relaxation of short‑selling rules for certain high‑liquidity securities in the wake of the COVID‑19 market crash. Meanwhile, the Australian Securities and Investments Commission (ASIC) has kept its short‑selling restrictions relatively tight, citing concerns over retail investor protection.

The Reuters piece linked to from the FCA’s announcement (https://www.reuters.com/business/finance/britains-fca-eases-short-selling-rules-hedge-funds-2025-10-28/) also references an upcoming survey of market participants scheduled for March 2026. The FCA will publish a summary of the survey results in June 2026, providing insight into how the changes are affecting trading strategies and risk profiles.

Implications for Investors

• Liquidity: The easing is expected to increase liquidity in the equity markets, as more short sellers can enter positions without the constraints of securing borrowing agreements.
• Volatility: Short‑selling can add to downward pressure during market sell‑offs. The FCA’s enhanced monitoring should mitigate extreme moves, but the possibility remains higher than under the stricter regime.
• Cost of Capital: By reducing the need for costly borrowing arrangements, hedge funds may lower transaction costs, potentially passing savings onto investors.
• Regulatory Oversight: While the rules are relaxed, the FCA maintains an active supervisory stance, ensuring that systemic risk is monitored continuously.

Looking Ahead

The FCA plans to conduct a comprehensive review after the first six months of implementation. During this period, it will assess whether the new short‑selling framework meets its objectives of maintaining market integrity and investor protection while supporting market efficiency. If any unintended consequences are detected—such as a surge in market manipulation or heightened volatility—the authority may reconsider the scope of the easing or introduce supplementary safeguards.

In a world where financial markets are increasingly intertwined, the FCA’s decision reflects an attempt to find a middle ground between stringent oversight and the dynamic needs of modern market participants. As 2026 approaches, the financial community will watch closely to gauge whether the new short‑selling regime delivers the promised benefits without compromising market stability.