The Financial Sector Conduct Authority has published a revised draft Conduct Standard that sets out requirements for the reporting and public disclosure of short sales. This initiative is designed to address a gap in South Africa’s regulatory framework, which currently does not mandate such reporting.
Short selling is a trading strategy where an investor borrows a security and sells it on the open market with the expectation that its price will decline. The investor aims to buy the security back later at a lower price, return it to the lender, and profit from the difference between the selling price and the buying price.
The Conduct Standard will apply to all listed securities, focusing solely on covered short sales while explicitly prohibiting uncovered short sales. An uncovered short sale is a short sale where the seller has not borrowed the security before selling it.
In a communication published on 28 March, the FSCA says the Standard aims to align domestic regulations with international best practices and standards. A robust legal framework for short sales will support the transparency of the short sales market and provide significant benefits, the FSCA says.
The Authority expects that enhanced disclosure will deter market abuse, reduce the risk of disorderly markets, and offer early warning signs of a build-up in large short positions – allowing the FSCA to take timely action. Additionally, public access to short sale data will improve market insight and assist with price discovery.
Rationale for the Conduct Standard
The Statement of Need outlines the current state and future regulatory considerations for short sales in South Africa.
During the 2008 global financial crisis, several countries imposed emergency measures on short sales, ranging from temporary bans to mandatory reporting, to mitigate the risk of exacerbating market declines. In parallel, the International Organization of Securities Commissions’ Task Force on Short Sales developed high-level principles for regulation, emphasising the need for controls, timely reporting, effective enforcement, and appropriate exemptions. These principles serve as a benchmark, particularly because reviews by the International Monetary Fund’s Financial Sector Assessment Program (FSAP) in 2014 and 2019 highlighted that South Africa does not yet meet the relevant international standards.
The document outlines and benefits and risks associated with short sales. It explains that short sales can be exploited for “market abuse” by driving down security prices to distorted levels. Moreover, they can lead to disorderly markets if investor reactions become excessive, and naked short sales may incur settlement risks because of delivery failures.
A dedicated regulatory framework is required to address these concerns. Such a framework would not only align South Africa with international supervisory standards mandated by the Financial Markets Act but also provide significant benefits. Enhanced transparency would help to deter abusive practices, offer early warnings of emerging risks, and improve overall market insight through better price discovery.
While acknowledging the role of short sales in promoting market efficiency and liquidity, the proposed framework seeks to balance these benefits against the potential for abuse and systemic risk.
The proposals, which include transactional and positional reporting and disclosure mechanisms, build on earlier public consultations and are aimed at creating a more robust and transparent short sale market in South Africa.
Consultation process
The Statement of Need outlines the evolution of the regulatory approach for short sale reporting and disclosure in South Africa.
On 20 November 2018, the FSCA released a Discussion Paper to gather industry feedback on establishing a short sale reporting framework, extending the public comment period until 15 January 2019. This consultation process informed the development of a draft Conduct Standard.
In March 2023, a first draft Conduct Standard was published for public comment, along with a detailed statement outlining its need, impact, and intended operation.
The FSCA says the current version – the second draft – represents a significant shift in approach, rendering many comments from the first consultation obsolete.
Issues arising from the first draft
The initial draft proposed that short sale orders be flagged on an exchange trading system, requiring clients to inform authorised users of short sale transactions so that each order could be marked. It was further suggested that these flagged transactions be aggregated and publicly disclosed the following day (T+1). This system was intended to provide daily figures on short sale activity.
Nevertheless, several practical issues were raised. Commentators pointed out that authorised users generally do not receive the necessary information from clients to determine whether a sale is a short sale, noting that this information is typically not shared with the authorised user. Additionally, challenges were identified in reporting open short sale positions when clients trade through multiple authorised users.
Given the legislative restrictions that prevent imposing direct reporting obligations on clients, the FSCA engaged with stakeholders to identify alternative solutions. It emerged that most local clients have their portfolios managed by financial institutions, which are better positioned to monitor and report short sale transactions. However, concerns remain for foreign clients, whose activities might go undetected.
Another issue discussed was the responsibility for receiving and publicly disclosing short sale data. Although some argued this should be managed by the FSCA, the Authority expressed that it is not well placed for this task and instead suggested utilising the first licensed trade repository in South Africa.
In summary, the FSCA supports shifting short sale reporting obligations to financial institutions as a means to capture the majority of local short sale activity, while also exploring alternative solutions for data disclosure and addressing the limitations associated with foreign client transactions.
Overview of the revised draft
The new draft Conduct Standard adopts a phased approach to implementing a short sale reporting and disclosure framework. As noted in the Statement of Need, because of all the practical concerns raised, the FSCA has decided to focus initially on the positional reporting of short sale data, removing the transactional reporting requirements for now.
In this first phase, the obligation to report is assigned to financial institutions that conduct short sale activities – whether by acting as principals or by executing transactions on behalf of investors.
The requirement stipulates that on every day when a security remains part of an open short sale position – defined by the condition that the security has not been bought back by T+3 (with reporting triggered on T+4) – the institution must report key information to a licensed trade repository. This information includes the day on which the security was sold and the type of security that was sold, along with the total number of open short positions. These measures will apply only if the open position exceeds a threshold that will be determined separately and subject to further consultation.
The draft also accommodates situations where an institution may not have all the necessary information. In such cases, the institution is required to take reasonable steps to obtain the information; if it remains unavailable, the reporting obligation will be waived.
After the data is reported, the licensed trade repository will aggregate and publicly disclose the information on its website the next day. The disclosure will include the total number of open short positions per security, both in absolute terms and as a percentage of issued shares, unless the open positions fall below the determined threshold.
Additionally, the draft Conduct Standard retains the existing prohibition on uncovered, or naked, short sales. This approach reflects a balance between enhancing market transparency and addressing the practical challenges identified during the consultation process.
Expected impact of the Conduct Standard
The FSCA says the draft Conduct Standard aims to improve the transparency and efficiency of the short selling market by mandating the reporting and public disclosure of short sale activities. It is envisaged that such reporting will indicate the level of short selling in a particular security, explain share price movements, and provide an early signal that individual securities may be overvalued.
Additionally, it is expected to show the proportion of sales that must be reversed to cover short seller settlement obligations, thereby reducing uncertainty and deterring market abuse.
The FSCA says enhanced transparency will deliver significant informational benefits, which are anticipated to outweigh the associated costs.
By making short sale information publicly accessible, the framework is designed to deter aggressive large-scale short selling that might threaten orderly markets and to offer early warning signs of a build-up in large short positions. This, in turn, will enable the FSCA to monitor market behaviour more effectively and take appropriate action when necessary.
Furthermore, the draft emphasises that positional reporting offers the most accurate depiction of bearish market sentiment, helping investors to assess whether a security is under- or overvalued. This approach supports pricing efficiency and market transparency. In addition, aligning the framework with international best practices, such as IOSCO principles and FSAP recommendations, reinforces South Africa’s reputation as a trusted market.
Although the introduction of these reporting requirements will incur regulatory costs, the FSCA says the impact will be minimal compared to previous proposals. Most expenses are expected to be one-off costs for setting up internal systems, and the use of existing infrastructure should further reduce ongoing costs.
Documents and deadline to comment
To download the draft Conduct Standard, the Statement of Need, and the comments template, go to www.fsca.co.za > Regulatory frameworks > Documents for consultation > Capital markets > 2025
Submissions on the draft Conduct Standard must be submitted using the submission template by 19 May 2025 and emailed to FSCA.RFDStandards@fsca.co.za.
