Following a period of public and targeted consultation with key stakeholders, the Minister for Financial Services, Superannuation and Corporate Law today released the much anticipated draft regulations for the permanent reporting and disclosure regime for short selling.
Overview
The draft regulations require:
Daily transactional reporting of covered short selling to market operators such as the ASX. The transactional reporting requirements are intended to replicate the current gross short sale reporting requirements in place under ASIC Class Order [CO 08/751]. Clients are required to report short sales to their brokers, who in turn report to the market operator. The market operator then releases the aggregate data to the market on the business day after the sales are executed.
Daily positional reporting by short sellers to ASIC. This information will be aggregated by ASIC and released to the public four business days after the positions are taken. The reporting of short positions is not expected to commence until 1 April 2010.
Click here for a copy of the draft regulations and here for associated commentary. While the Government has indicated that the policy reflected in the draft regulations will not change, it is seeking comments from stakeholders on a range of technical issues by 23 October 2009.
Reporting of short positions
Features of the proposed positional reporting regime include:
Sellers must report their short positions in listed entities to ASIC by 9.00am on the third business day after entering into the sale that creates the short position.
Short positions must be reported again before 9.00am on each subsequent business day as long as the short position exists.
It is envisaged that ASIC will specify a threshold that will exclude small short positions from having to be reported. This approach is consistent with some foreign jurisdictions such as the UK. It is not yet known what this threshold will be.
The delay of release to the public of four business days after positions are taken is intended to address industry concerns that the release of short positions too early may compromise trading strategies.
It appears that ASIC will disclose the aggregate of all short positions for each class of security, rather than the identity of the holders of the short positions.
Key issues
The proposal for positional reporting to ASIC is new for the Australian market and raises significant implementation and other issues for investors and market participants. These include:
Developing systems to capture short position data and electronically report that data to ASIC in a timely manner.
There are a number of drafting issues with the definition of “short position” in the draft regulations. In particular, the definition refers to products held “on the person’s own behalf”, which does not seem to cater for common investment trusts. Further, the drafting may have the result that a short position no longer exists after the settlement of a short sale, at least until the loan used to settle the short sale is recalled.
The short position reporting requirements apply to persons generally, and do not cater for persons acting in different capacities (eg. as trustee of two separate trusts). Similarly, there is no attempt to address the reporting difficulties created by two trading desks within the one entity. The Government has sought comment on these issues.
Recap on the current short selling regime in Australia
The Australian short selling regime has now entered into a period of relative stability, with the exception of the permanent disclosure regime discussed in this release. The main features of the regime are:
Naked short selling is banned, subject to some limited exceptions.
Covered short selling is permitted. Securities loans must provide a “firm commitment” to deliver the relevant financial products in order to avoid a prohibited naked short sale.
A temporary gross transactional reporting regime is in place through ASIC Class Orders, along the lines of the transactional reporting requirements in the proposed regulations.
Securities lending activity is reported by participants in the ASX’s CHESS settlement system. These reporting requirements are subject to a phased introduction, and include real time tagging, daily reporting and quarterly reporting. All these securities lending reporting requirements are expected to be mandatory by December 2009.
Short selling relief for market makers
Following a period of consultation, in September 2009 ASIC introduced a new exception to the ban on naked short selling. The relief permits market makers to sell a security or managed investment product in order to hedge a risk arising from their market making activities (Class Order [CO 09/774]). Various conditions must be satisfied in order for the relief to apply, for example:
The product sold short must be a constituent of the S&P/ASX 200 index, and
By the end of the day of sale, the market maker must acquire, enter into a contract to acquire or borrow sufficient products to ensure that they can settle the sale.
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