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Banking and finance

New Australian short selling regime (as at 21 January 2009)

As anticipated in our September update, the Corporations Amendment (Short Selling) Act 2008 (Short Selling Act) became law on 11 December 2008. The three key measures under that Act include:

  • a legislative ban on naked short selling (with limited exceptions - see below)

  • a disclosure regime for permitted covered short selling, and

  • a clarification and expansion of ASIC’s powers to limit, prohibit or impose additional conditions on short selling transactions.

In other major markets, the UK Financial Services Authority lifted the ban on certain short selling of shares in UK financial companies, effective 16 January 2009. This follows the US Securities and Exchange Commission lifting its short selling ban in October 2008.

You can view a copy of the Act by clicking here and a copy of the Explanatory Memorandum by clicking here.

Ban on naked short selling

Under the Corporations Act, naked short selling is banned (subject to limited exceptions). The Short Selling Act further limited the exceptions to the naked short sale ban, effective 8 January 2008. The current exceptions relate to:

  • situations where the seller has already contracted to buy the relevant financial products at the time of the sale, and the purchase is only conditional on payment of consideration or receipt of transfer or title documents

  • giving or writing of certain exchange traded call options, and certain sales resulting from the exercise of exchange traded options

  • sales where the seller can obtain the sold financial products by exercising exchange traded options, and

  • sales of corporate and government bonds where certain conditions are satisfied.

Temporary ban on covered short selling of financial stocks

The ASIC ban on covered short selling of financial stocks (with limited exceptions - see below) has been extended from 27 January 2009 to 6 March 2009. Financial stocks are those comprising the S&P/ASX 200 Financials (including property funds) plus five other APRA regulated businesses. The exemptions to the ban on covered short selling of financial stocks relate to:

  • certain hedging by market makers in certain circumstances

  • certain arbitrage transactions

  • hedging exposures arising from underwriting a dividend/distribution reinvestment plan or security/interest purchase plan

  • hedging exposures arising from being issued securities/interests on conversion of a convertible, and

  • hedging of pre-22 September 2008 exposures.

Covered short selling of non-financial stocks is permitted subject to the disclosure regime discussed below.

Disclosure of covered short selling

The Short Selling Act provides for a permanent disclosure regime for covered short selling that is expected to be introduced over the next 12 months. Much of the detail of the new disclosure and reporting regime is not known, as it will be contained in regulations which have not yet been released.

The new regime under the Short Selling Act is expected to replace the current disclosure and reporting regime which requires disclosure and reporting of ‘long sales’, ‘short sales’, ‘exempt covered sales’ and ‘naked exchange traded option short sales’.

It is expected the new regime will require that the client advise their executing broker if the sale is a covered short sale. The broker must in turn report details relating to the information disclosed to it, to the relevant market operator (e.g. the ASX). The market operator must then publicly disclose the reported short sale information.

The disclosure requirements will apply to both Australian and overseas sellers. Regulations will set the timing and manner of disclosure. Failure to comply with the disclosure requirements will be an offence.

These recent development may affect your business if it short sells securities, managed investment products and certain other products.
Your business should prepare for the disclosure regime to apply to permitted short selling and keep itself informed of further ASIC announcements affecting short selling.

 

Who does this affect?

Companies whose business operations are involved in the energy and resources sector.

What do you need to do?

This publication aims to provide you with an overview of recent legal developments that are relevant to your business. Should you wish to discuss any of the information attached please contact the relevant Partner.

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