ASIC Position On Short Selling

The continuing effects of the global financial crisis have resulted in what some have called unprecedented turmoil in financial markets. Some of the volatility in stock markets has been blamed on short selling.

Short selling is an activity whereby an entity enters into an agreement to sell a security that it does not currently own. A ‘covered’ short sale occurs when the seller has arranged to borrow the security in order to meet their delivery obligations prior to entering into the agreement to sell the security. A ‘naked’ short sale occurs when the seller has not arranged to borrow the security it intends to sell at the time of the sale, but intends to do so later to meet its delivery obligations. In response to foreign jurisdictions imposing emergency restrictions on short selling, ASIC has acted promptly to protect Australia’s position by banning short selling for 30 days from 22 September. In the interim, ASIC has issued a number of class orders providing for exceptions to the general ban.

The current position in Australia is summarised as follows:

1 Naked short selling is banned.

2 Covered short selling is banned subject to the following exceptions:

2.1 Some classes of short sale made by certain market makers who do not know, after making reasonable inquiries, that the issue or sale would result in establishing or increasing an economic net short position.

2.2 Arbitrage transactions in relation to the securities of dual listed entities or as part of an index arbitrage transaction.

2.3 Managing risk associated with being issued certain convertible securities or underwriting dividend reinvestment plans and security purchase plans.

2.4 Hedging by market makers for positions existing prior to 22 September.

2.5 Exercising an option registered with Australian Clearing House Pty Limited subject to disclosure requirements 3.2 and 3.3 below.

3 The following disclosure requirements for permitted short sales apply:

3.1 The entity requesting the sale must disclose that it will be a short sale to the AFSL holder making the sale on its behalf.

3.2 The AFSL holder must ask before selling on behalf of another entity whether the sale would be a short sale.

3.3 The AFSL holder must disclose their net covered short position at 7pm on each trading day to the market operator by 9am on the following trading day.

In addition, an Exposure Draft of potential new legislation to replace the interim measures relating to reporting of covered short sales, the Corporations Amendment (Short Selling) Bill, is available for review and comment until 21 October 2008.