No More Going Naked

On 13 November 2008 the Federal Government announced details of the final Corporations Amendment (Short Selling) Bill 2008 (the Bill) which is designed to impose permanent restrictions on short selling.

According to the Government, the objective of the Bill is to increase transparency on the quantity of covered short sale activity in Australian securities and to reduce the opportunities for market abuse.

The key features of the Bill include:

• a prohibition on naked short selling (ie, short selling by entities who, at the time of selling, are neither the owner of the securities nor have arrangements in place to meet their delivery obligations)

• a clarification of the powers of the Australian Securities and Investments Commission (ASIC) to monitor covered short selling and impose regulations on transactions that have a "substantially similar market effect" as short sales under the Corporations Act 2001 (Cth)

• a legislative confirmation of ASIC's previous declarations in relation to short selling (ie, CO 08/751 and 08/752)

• a comprehensive disclosure regime for permitted covered short selling.

The new disclosure regime will impose some regulatory costs on investors, brokers and market operators (ie, the Australian Securities Exchange (ASX)) that are required to collect and report information in relation to covered short selling.

Under the new legislation, brokers will be required to query whether a sale of securities is a covered short sale when a client places a sell order and record the seller's answer in writing. It will be an offence if a broker fails to make these inquiries. Market operators will also be required to publicly disclose to the market information they obtain from brokers in relation to short selling.

Further details regarding the timing and manner of disclosure of short selling information will be dealt with in the Regulations, which are intended to be drafted in consultation with industry participants.

The Government's decision to place a legislative ban on naked short selling mirrors recent action taken by ASIC and the ASX in September. The new legislation provides that ASIC will have the power in certain circumstances to grant exemptions from the prohibition on naked short selling where these types of short sales are necessary to ensure the ordinary operation of the market.

ASIC also re-affirmed that it will lift its current ban on covered short selling for non-financial securities from opening trade on 19 November 2008 but will maintain the ban on financial securities until at least 27 January 2009.

The ban on covered short selling was initially implemented by ASIC on 22 September 2008 in response to similar moves by overseas regulators including the US, UK, France, Germany, Switzerland, Ireland and Canada. According to ASIC, its decision to maintain the ban on covered short selling was primarily due to the ongoing fragility of global financial markets.

The Bill has been referred to the Senate Economics Committee and a report is due from the Committee on 27 November 2008.

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