Australia: ASIC Clarifies Its Prohibition On Short Selling

Last Updated: 17 October 2008
Article by Richard Batten

The Australian Securities and Investments Commission (ASIC) has provided further clarification on its prohibition on short selling.

A summary of ASIC's announcements and related clarifications since Friday 19 September 2008, include:

1. An extension to the prohibition of covered short sales

Class order 08/753: Variation to Class Order 08/751, which came into effect on 22 September 2008, corrects the drafting anomaly in C0 08/751 by extending the prohibition on covered short sales to managed investment products and stapled securities. The prohibition includes covered short sales of securities, managed investment products and stapled securities, subject to the market makers exception. The prohibition does not currently extend to the short sale of derivatives.

2. Hedging for existing positions

ASIC indicated it will issue no action letter to certain market participants who may need to hedge exposures under obligations entered into before 22 September 2008.

3. Dual Listed entities

ASIC provided relief to persons engaging in arbitrage transactions in relation to dual listed securities to make covered short sales of the relevant securities in Australia.

4. All exchange-traded options (ETOs)

ASIC provided relief for sales from the exercise of ETOs issued before or after 22 September 2008.

5. Index arbitrage transactions

ASIC provided relief to index arbitrage transactions that are unlikely to be a mechanism for market abuse.

6. Market Makers

In line with the decisions of its international counterparts, ASIC has widened the exemption given to market makers for transactions that satisfy the requirements set out by ASIC. As a result , market makers will be permitted to undertake certain activities:

  1. client facilitation
  2. hedging certain OTC equity swaps
  3. guaranteeing VWAP to a client
  4. hedgeing CFD products where the client holds a long position.

7. Covered short sales to manage risk associated with underwriting corporate transactions

ASIC will grant relief where covered short sales occur to manage risk associated with underwriting of dividend reinvestment plans, share purchase plans and convertible bonds and hybrids.

8. Disclosure

Where covered short selling is permitted, the short selling transaction must be disclosed in accordance with CO 08/751: Disclosure of covered short sales. These requirements apply to trading from 22 September 2008 and are equivalent to end of trading day net short sale position disclosure under the ASX Market Rules. However, unlike the US and UK requirements, the Australian requirements are not subject to any monetary or holding thresholds.

9. Reporting requirements for direct market access providers

ASIC will consider individual applications for a no-action position. This will, in certain circumstances, relieve Direct Market Access (DMA) service providers from enquiry obligations to sell orders, where the DMA operator knows the client holds the shares that are the subject of the automated trading. The no action positions will be conditional on notifying clients that short sales are not permitted.

10. Implications of the prohibitions for government securities

The short selling prohibitions and reporting and disclosure requirements do not apply to government securities.

11. Securities subject to securities lending arrangement

Late on 24 September 2008, in line with the approach taken by the UK Financial Services Authority, ASIC issued a 'no action' position (ie. a statement that it will not take any action) for a breach of short selling requirements in relation to the sale of securities which are have been placed in a securities lending program provided by an established securities owners selling from stock lending portfolios where:

  • the sale is a bona fide sale transaction from the portfolio
  • the seller has full beneficial ownership in the securities or held them as an institutional investor such as in a managed investment scheme, superannuation fund, insurance company statutory fund
  • at the time of the sale, the seller is entitled to recall the number of securities sold from the securities lending program
  • the seller recalls a sufficient number of securities from the securities lending program before or as soon as practicable after the sale (please see AD 08-23).

12. Draft Bill

Finally, an exposure draft of the Corporations Amendment (Short Selling) Bill has been released for comment by 21 October 2008. A copy of the bill can be accessed here.

Ongoing review

ASIC will continue to monitor the market and may make relevant changes to the exemptions. In particular, ASIC will monitor the use of the exemptions in the CFD and options markets.

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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