CSA and CIRO Publish Summary of Comments and Responses to Short Selling Consultation

On November 16, 2023, the Canadian Securities Administrator (CSA) and the Investment Industry Regulatory Organization of Canada (now, the Canadian Investment Regulatory Association) (CIRO) published a summary of comments it received from investors, market participants and the public on a broad range of issues relating to the regulatory framework surrounding short selling in Canada, as well as their responses to the comments received. While a number of areas were highlighted as possible matters for further study and analysis, the CSA and CIRO noted there was no consensus on the appropriate regulatory regime for short selling and no specific changes are proposed at this time.

Background

On December 8, 2022, the CSA and CIRO released joint Staff Notice 23-329 (the “Staff Notice”) seeking public feedback on areas for regulatory consideration concerning short selling in Canada. Particulars of the Staff Notice can be found in our December 13, 2022 Update, CSA and IIROC Seek Guidance on Regulatory Framework for Short Selling in Canada. 

In response to eight specific questions posed in the Staff Notice, CIRO received 23 comment letters from a wide range of stakeholders, including industry associations, exchanges, dealers, issuers and investors. On November 16, 2023, the CSA and CIRO published a summary of comments it received and responses prepared by CSA and CIRO staff (available here).

Responses to the Staff Notice

Specifically, the CSA and CIRO noted the responses represented a broad range of opinions on the regulatory regime for short selling. Most commenters were of the opinion that short selling is a legitimate trading practice and many commenters indicated they thought Canada’s current regulatory regime is fundamentally sound. However, certain commenters viewed Canada’s regulatory regime as less stringent than those in place in Europe, Australia or the US and called for more regimented guidelines due to the risk of short selling becoming abusive.

Specific areas identified for potential further study and analysis included, among others:

• Pre-borrow requirements. Commenters were split on whether there should be “pre-borrow” requirements similar to those in the US. A pre-borrow requirement could require a short seller to make arrangements to borrow the securities being sold before entering into a short sale transaction or, in the less stringent alternative, impose a duty on dealers to have a reasonable belief that the securities are readily available for borrowing in time for the settlement of the trade. Some commenters supported the implementation of pre-borrow or locate requirements, while others opposed implementing pre-borrow requirements akin to those in the US, criticizing the high industry costs and insufficient evidence that such requirements are necessary to address a significant problem. The CSA and CIRO cautioned that mandatory pre-borrow requirements could have an adverse effect on certain dealers and their clients who may not have access to the same pools of securities available to be borrowed as other dealers, which could create an uneven playing field.

• Transparency requirements. The CSA and CIRO sought guidance on whether additional public transparency requirements of short selling activities should be considered. Currently, CIRO publishes the Short Sale Trading Statistics Summary Report twice monthly, which discloses the aggregate proportion of short selling in the total trading of a particular security. However, there are no regulatory or public reporting requirements to disclose information on the short position of an individual account, though CIRO has noted it is not uncommon for an active short seller to opt for voluntary disclosure when starting a campaign. Many commenters considered the current transparency requirements appropriate, while others supported additional transparency requirements, including increased frequency of public disclosures or prohibiting brokers from making a sale anonymously. In response to these comments, the CSA and CIRO reiterated that CIRO publishes short sale trading statistics and reports twice monthly, noting any further policy analysis will consider the comments received.

• Additional reporting requirements. Feedback was requested on whether additional reporting requirements regarding short selling activities should be considered by the securities regulatory authorities. The CSA and CIRO acknowledged that most of the commenters did not support additional reporting requirements.

• Specific requirements for junior issuers. CIRO’s study of failed trades showed that the correlation between short sales and settlement issues in junior securities was more significant, with securities of junior listed companies experiencing more settlement issues compared to other securities. As such, the CSA and CIRO sought guidance on whether specific reporting, transparency or other requirements should be considered for junior issuers. The vast majority of commenters believed the requirements should be the same for both junior and senior issuers, with only a few commenters suggesting it would be appropriate for the junior segment to have more frequent public disclosure of short positions, more prescriptive buy-in requirements and transparency requirements aligned with those in the US.

• Mandatory close-out or buy-in requirements. The commenters were split on whether mandatory close-out or buy-in requirements (similar to those in the US and European Union) would benefit the Canadian capital markets. A mandatory close-out or buy-in requirement would force a dealer or buyer, as the case may be, to close out a short position if the securities sold or purchased have not been delivered within a prescribed period of time. Some commenters supported the inclusion of close-out or buy-in requirements because they felt they would increase investor confidence and market efficiency, align Canada’s regulations more closely to the practice in global markets (including the US, European Union and Australia), reduce predatory short selling and increase investor protection. Others felt these requirements would not be necessary if there were sufficient locate or pre-borrow requirements. Ultimately, the CSA and CIRO highlighted that commenters were split on this issue and noted these comments would be considered to the extent further policy analysis is conducted.

Looking Forward

While no changes to the regulatory landscape on short selling are being proposed at the moment, the CSA and CIRO indicated they will continue to consider whether any changes may be appropriate in the future. They are expected to form a staff working group to more broadly examine short selling issues in Canada in early 2024.

For further information concerning short selling in Canada, please contact any member of our Capital Markets Group or Financial Services Regulatory Group.