Anyone engaged in short selling of securities, and brokers and holders of AFSLs that trade securities.
What do you need to do?Consider the impact on your operations and record keeping of the ASIC ban effective 22 September 2008 on naked and covered short selling of Australian securities by anyone other than certain market-makers.
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Scott Farrell
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Sydney
David Friedlander
Martin James
Damien Richard
Melbourne
John Malon
Ian Paterson
Brisbane
Berkeley Cox
Hong Kong
Richard Mazzochi
London
Rowan Russell
Author
Martin James
The Australian Securities and Investments Commission (ASIC) banned covered short selling in the Australian market late on Sunday 21 September 2008. This followed an earlier move by ASIC on Friday 19 September 2008 to ban naked short selling and introduce reporting for covered short sales.
Details
On Sunday 21 September 2008, and following similar action in the United States, Canada, the United Kingdom, Germany and other jurisdictions, the Australian Securities and Investments Commission took decisive action to ban all short selling (naked and covered) in the Australian market, for both financial and non-financial stocks. ASIC proposes to re-assess and advise the market in 30 days whether or not it will at that time re-open covered short sales for non-financial stocks. See ASIC’s Sunday media release and Instrument.
Earlier, on Friday 19 September 2008, ASIC, in consultation with the Australian Stock Exchange, had taken action to ban all naked short selling and require reporting of covered short selling. According to ASIC at that time, the package was aimed at achieving three things:
- first, from the opening of the market on Monday 22 September 2008, naked short sales on ASX’s approved list in the cash equity market would not be permitted,
- secondly, ASIC issued clarification of what are the covered short sales which will continue to be permitted, and
- thirdly, for covered short sales which continue to be permitted, ASIC introduced reporting requirements through the ASX.
Friday media release, Instrument and Regulatory Guide
FAQs
1. At what time does the new naked and covered short selling prohibitions come into force?
Opening of market Monday, 22 September 2008.
2. When do these obligations end?
ASIC will re-assess the market position in 30 days.
3. Will the Government extend these obligations?
Unknown - the Federal Government has indicated it is supportive of ASICs action.
4. Will the prohibition relate to “covered short positions”?
Yes
5. Can a person increase their short position intra-day, provided that the position held at the end of that day does not exceed the position at the start of the day?
No.
6. Are there any exemptions to these new prohibitions?
Persons who are a market maker or warrant market maker in accordance with the ASX Market Rules when conducting market making activities.
7. Are contracts for difference caught?
The prohibition does not apply to dealings in contracts for difference. The short selling prohibitions apply to securities, managed investment products and Government debentures, stocks or bonds.
8. What are the investor disclosure implications for hedge fund managers?
Operators of hedge funds that have issued a PDS in the Australian market may need to issue a supplementary PDS to the extent that the fund's investment strategy, at least temporarily, may no longer be implemented. Disclosure may also need to be made regarding the uncertainty as to when the ban on short selling will be lifted.
9. What about other derivatives?
Whilst derivatives that only involve synthetic obligations should not be caught, derivatives that may involve physical settlement require more detailed analysis.
Please call a member of our team to discuss the implications for your business of these developments.