The Australian Securities and Investment Commission (ASIC) joined its US and European counterparts in announcing new measures in relation to short selling in an effort to restore investor confidence and maintain the fair and orderly operation of the market.

The new measures were announced on 19 September 2008 in consultation and co-operation with the Australian Securities Exchange (ASX), and further clarified by ASIC on 21 September 2008. They apply from the opening of the market today, Monday 22 September 2008.

The measures, which have been described by ASIC Chairman Mr Tony D'Aloisio as 'circuit-breakers', include:

  • a ban on all naked short selling transactions
    From the opening of trading today, ASX will remove all securities from its Approved Short Sale Products List – the list of stocks approved for naked short selling. This means that the exemption afforded by s1020B(4)(e) of the Corporations Act 2001 (Cth) no longer applies.
  • a ban on all covered short selling transactions (subject to a limited authorised market-maker exception)
    Covered short sales of securities, which were previously authorised under s1020B(4)(c) or (d) of the Corporations Act, will not be permitted, except for those transactions entered into by ASX Approved Market Makers or Warrant Market Makers.
  • reporting and disclosure requirements for permitted covered short sales
    A market participant must, at no later than 9:00am on each trading day, inform the market operator of their net covered short positions as at 7:00pm on the previous trading day.

In addition, a market participant must before selling a s1020B product on behalf of another person, ask that person whether the sale would be a short sale to which the reporting and disclosure requirements apply. The market participant must record the answer to this question in written or electronic form before selling the products.

These measures have been introduced to ensure that the restrictions imposed by other international regulators do not cause unwarranted activity on the Australian market.

ASIC will reassess the position for covered short sales for non-financial stocks in 30 days. In the case of financial stocks, the review period will reflect the time limits imposed by other regulators, such as the UK Financial Services Authority (16 January 2009) and US Securities and Exchange Commission (1 October 2008 unless extended). ASIC has also indicated that the proposals will be in place until the Government's proposed short selling legislation.

While the Australian measures are similar to those imposed by other regulators, the following features are distinct:

  • the prohibitions are not limited to financial stocks which was the approach taken by the UK Financial Services Authority (FSA)
  • the reference to 'securities' and the narrow definition of 'securities lending arrangements' in ASIC Class Order 08/751 and 08/752 may mean that listed funds and derivatives or other hybrid instruments that only involve synthetic obligations may not be subject to these new measures and
  • the implications for counterparties of ASX Approved Market Makers is unclear.

ASIC has indicated that it will work with industry on transitional issues affecting bona fide market transactions.

This morning, ASIC also advised market participants that it would provide a no action letter for hedging of existing positions of market makers arising from their client business. The terms of that letter are expected to be settled today.

In conjunction with its earlier class order simply requiring the reporting covered short sales, ASIC also issued Regulatory Guide 196 – Short selling: Overview of s1020B which explains the regulation of short selling in Australia under s1020B of the Corporations Act 2001 (Cth).

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