Effective 22 September 2008, ASIC has banned the short selling
of securities (subject to a limited authorised market-maker
exemption). ASIC's move has been made in response to
announcements by overseas regulators including the US, the UK and
now France, Germany, Switzerland, Ireland and Canada. The changes
have been implemented by two new class orders and are effective
Until now, subject to certain exemptions, section 1020B of the
Corporations Act has banned the short selling of:
managed investments products;
debentures, stocks or bonds issued by a government; or
unless the seller of the product "has a presently
exercisable and unconditional right to vest the products in the
buyer" (Covered Short Sale).
Regulatory Guide 196 - Short Selling: Overview of Section
1020B (RG 196) states that "Covered
Short Sale", requires that there is a "legally binding
commitment" between the seller and the buyer that the seller
will provide the buyer with legal title to the financial product on
settlement. RG196 considers that the best evidence of a
"legally binding commitment" will be a written
confirmation for delivery into settlement and goes on to state that
that an agreement between the parties to use their "best
endeavours" to provide the buyer with securities is
Two new class orders
On Friday, 19 September 2008, ASIC released Class Order 08/751
(CO 08/751). This was followed by Class Order
08/752 (CO 08/752) on Sunday, 21st
CO 08/751 and CO 08/752 require financial services licensees
ask clients selling "section 1020B products" on a
financial market whether the sale is a "short sale";
record (in writing or via electronic means) the client's
response before selling securities;
advise clients that all "naked" short selling is
banned and all Covered Short Selling is also banned (subject to a
limited authorised market-maker exemption) for the next 30 days
(during which time ASIC will reassess whether or not to re-open
Covered Short Sales).
Securities covered by this new law include:
shares listed on the ASX,
corporate debt securities able to be traded on licensed markets
(including electronic trading platforms licensed as a market).
The Australian Office of Financial Management
(AOFM) have been advised by ASIC that the
prohibition of Covered Short Selling contained in CO 08/752 does
not apply to the short selling of Commonwealth Government
What does this mean for existing conditions?
The prohibitions contained in CO 08/752 do not apply to short
positions or short sale orders entered into prior to 22 September
ASX Trading Participants are required to continue to comply with
net Short Position Reporting requirements for positions entered
into prior to the prohibition on short-selling. This includes Net
Short Sale positions for Covered Short Sales.
What does this mean for ASX approved market makers?
ASX will contact all ASX Approved Market Makers directly to
confirm your short selling status.
In addition, ASIC has advised that it will provide a "no
action letter" to enable market makers to continue to hedge
open positions arising from client business. It is anticipated that
the terms of the "no action letter" will state that the
prohibitions on Covered Short Sales will not apply to hedging a
position or an order entered into prior to 22 September 2008 as
part of its business of dealing as principal in equities, options
or derivatives (whether OTC or exchange-traded) to fulfil orders
received from clients or to respond to a client's request to
trade, in each case before that date.
The "short sale volume rule" and "up-tick
rules" continue to apply to "Approved Short Sale
Products" and approved "Short Sale ETF designated
products", however, at this time all products have been
removed from these lists.
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.
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