Australia: ASIC Prohibits Short Selling Of “Borrowed” Stock

Last Updated: 23 September 2008
Article by Shane Bilardi, Ron Holzer and Robert Sultan

What this means for you

  • Both naked short selling and covered short selling (except for a limited market maker exception) are banned for the time being. ASIC will reassess this position in 30 days time.
  • It appears that brokers could be liable for short selling by their clients, whether they know that the trade is a short sale or not. This is most likely an error in the drafting of the relevant Class Order but we are not aware of any amendments to the Class Order at this stage.
  • In any event, brokers should seek confirmation (preferably written) from their clients before each sale that their client is the owner of the shares being sold and that their ownership is not as a result of a securities lending arrangement.

What has happened to date?

  • On Friday of last week, ASX announced that it would remove all products from the ASX Approved Product List for naked short sales having the practical effect of requiring short sales to be covered.
  • On the same day, ASIC issued Class Order 08/751 imposing reporting obligations in relation to covered short selling.
  • On Sunday, ASIC issued a Class Order 08/752 prohibiting covered short selling (except for a limited market makers exception).
  • Today, ASIC issued Release AD08-20 stating that it will provide a no action letter for hedging of existing positions of market makers arising from client business.

Why has this happened?

ASIC has taken the action to ban short selling in reaction to fears that hedge funds would move their short selling activities to Australia in response to bans or restrictions on short selling in overseas jurisdictions.

What does this all mean?

Prior to ASIC's actions in the last few days, the legal position, in basic terms, was that naked short selling was prohibited except in relation to certain shares approved by ASX but covered short selling was legal.

That is, section 1020B(2) of the Corporations Act provided that a person must only sell a section 1020B product (which includes securities and managed investment products) if at the time of the sale the person has a "presently exercisable and unconditional right to vest the products in the buyer". Section 1020B(4)(e) then provided that the short selling restriction does not apply to products which are included in a class of products in relation to which there is in force a declaration permitting short selling. In essence, this permitted naked short sales in relation to products included on the ASX Approved Product List and covered short selling.

Friday, 19 September 2008

On Friday 19 September, 2008, ASIC announced in Release 08-204 that all products would be removed from the ASX Approved Product List. That is, naked short selling was effectively prohibited.

On Friday 19 September, 2008, ASIC also issued Regulatory Guide 196 clarifying the meaning of having "a presently exercisable and unconditional right to vest the products in the buyer". In that Regulatory Guide, ASIC states that a person who holds legal title to the product at the time of the sale, would have a "presently exercisable and unconditional right to vest". The Regulatory Guide suggests that in a case of securities lending arrangements, "a presently exercisable and unconditional right to vest" would involve the lender giving the borrower a legally binding commitment to deliver products. The Regulatory Guide states that an agreement made at the time of the sale for the lender to provide the borrower with securities on a "best endeavours basis" cannot provide a "presently exercisable and unconditional right to vest" the financial product.

In essence, Regulatory Guide 196 provides that short selling is permissible where the seller owns the product by way of a legally binding securities lending arrangement, but restricts day traders who intend to buy back the stock on ASX on the same day as the day of sale, but after the sale takes place.

On the same day, ASIC also issued Class Order 08/751 which applied to sales made on a licensed market where at the time of the sale, the Seller's "presently exercisable and unconditional right to vest the products in the buyer" results from a securities lending arrangement entered into before that time. The Class Order required the broker to inform the market operator by no later than 9:00pm on each trading day of its net covered short position as at 7:00pm on the previous trading day. The Class Order imposed an obligation on a person who requests a broker to make a sale to inform the broker if the person's ownership in the securities being sold is as a result of a securities lending arrangement. Further, the Class Order required brokers to ask their clients whether their ownership of the products being sold arises under a securities lending arrangement the client has entered into. Effectively, this meant that covered short selling would still be permitted but enhanced disclosure of short selling would be required from both sellers and brokers.

Sunday, 21 September 2008

On Sunday 21 September, 2008, ASIC issued Release 08-205 together with Class Order 08/752.

That Class Order provides that a person must not sell a security if the person's "presently exercisable and unconditional right to vest the security in the buyer" arises as a result from a securities lending arrangement. In essence, the Class Order prohibits a person from selling securities where the person's only interest in the securities arises under a securities lending arrangement. That is, covered short selling is also prohibited. At this stage, this ban appears to be temporary with ASIC indicating that it will reassess its position in 30 days.

The wording of the Class Order potentially makes brokers liable for prohibited short selling activities by their clients. Under the new provisions created by the Class Order, a person must not sell securities on behalf of another person if at the time of the sale that other person has a presently exercisable and unconditional right to vest the securities in the buyer because of a securities lending arrangement entered into before that time. Accordingly, if a broker is selling shares on behalf of a client and that client is relying on a lending arrangement to cover that sale, then arguably the broker could be breaching the new provisions, whether the broker knew about the lending arrangement or not. This application of the provisions appears to be broader than what was probably intended.

The Class Order does not apply to Market Makers and Warrants Market Makers for the purposes of managing, avoiding or limiting the financial consequences of issuing or holding a derivative in the course of the person's market making activity.

Monday, 22 September 2008

Today, ASIC issued Release AD08-20 stating that it will provide a no action letter for hedging of existing positions of market makers arising from client business. While the terms of the no action letter are currently being prepared by ASIC, the letter will be to the effect that the prohibitions on covered short sales set out in Class Order 08/752, will not apply to:

  • hedging a position that was taken by an entity prior to 22 September 2008 as part of its business of dealing as principal in equities, options or derivatives to fulfil orders received from clients; or
  • respond to a client's request to trade provided that the order or the request was made prior to 22 September 2008.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Shane Bilardi
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.