Upcoming Mallesons seminarsAnyone that short sells securities, managed investment products and certain other products, and brokers who sell those products on behalf of others.
What do you need to do?Get ready for the legislative ban on naked short selling and the disclosure regime for permitted covered short selling.
Jim Boynton
Partner
Jim Boynton
Partner
T +61 2 9296 2086
Mark McFarlane
Partner
T +61 2 9296 2478
Sydney
Scott Farrell
David Friedlander
Martin James
Damien Richard
Melbourne
John Malon
Ian Paterson
Brisbane
Berkeley Cox
Hong Kong
Richard Mazzochi
(馬紹基)
London
Rowan Russell
The Corporations Amendment (Short Selling) Act 2008 became law on 11 December 2008. The three key measures include a legislative ban on naked short selling, a disclosure regime for permitted covered short selling, and clarification of the Australian Securities and Investments Commission's (ASIC) powers.
Ban on naked short selling
Naked short selling is currently banned under the Corporations Act subject to exceptions. Short selling currently permitted under the Corporations Act relates to:
- Odd lot transactions
- Arbitrage transactions
- Transactions where arrangements have been made before the time of sale that will enable delivery of the product in time for settlement, and
- Transactions made under a declaration from the operator of a licensed market in accordance with the operating rules of the market.
Short selling of the fourth kind is currently banned under action taken by ASIC and the Australian Securities Exchange (ASX).
The Act will ban all naked short selling. The only exception will be for sales by a person who, before the time of sale, has entered into a contract to buy those products and who has a right to have those products vested in the person that is conditional only on:
- Payment of the consideration in respect of the purchase
- The receipt by the person of a proper instrument of transfer in respect of the products, and/or
- The receipt by the person of the documents that are, or are documents of title to, the products.
The Act will allow ASIC to make exemptions.
Disclosure of covered short selling
Secondly, the Act provides a disclosure regime for permitted covered short selling. To be covered, the seller of securities, managed investment products and certain other products must have a presently exercisable and unconditional right to vest the products in the buyer.
Short sellers must advise the executing Australian financial services (AFS) licensee when a sale is a covered short sale (a short sale supported by a securities lending agreement). The AFS licensee will have to ask whether the sale is a covered short sale before making the sale. The AFS licensee must then report the disclosed covered short sales to the relevant market operator (e.g. the ASX). The market operator must publically disclose the reported short sale information. The disclosure requirements apply to sellers inside or outside Australia. Regulations will set the timing and manner of disclosure. Failure to comply with the disclosure requirements will be an offence.
Clarification of ASIC's powers
The third key measure is the clarification of ASIC's powers to omit, modify or vary parts of the Corporations Act relating to short selling and transactions with a substantially similar market effect.
Timing
The legislative ban will commence on 8 January 2009. The commencement date for the new disclosure regime is yet to be proclaimed. The disclosure regime draft regulations are yet to be released. In the meantime, the ASIC ban on short sales of financial products and disclosure requirements for non-financial products continue. The ASIC ban for financial products is expected to be lifted some time after 27 January 2009.
See the Act, EM, Media releases, 13 November 2008, 5 December 2008, Committee report and List of submissions.