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
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
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
2.5 Exercising an option registered with Australian Clearing
House Pty Limited subject to disclosure requirements 3.2 and 3.3
3 The following disclosure requirements for permitted short
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.
Phillips Fox has changed its name to DLA Phillips Fox
because the firm entered into an exclusive alliance with DLA Piper,
one of the largest legal services organisations in the world. We
will retain our offices in every major commercial centre in
Australia and New Zealand, with no operational change to your
relationship with the firm. DLA Phillips Fox can now take your
business one step further − by connecting you to a global
network of legal experience, talent and knowledge.
This publication is intended as a first point of reference
and should not be relied on as a substitute for professional
advice. Specialist legal advice should always be sought in relation
to any particular circumstances and no liability will be accepted
for any losses incurred by those relying solely on this
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