Effective 22 September 2008, ASIC has banned the short selling of securities (subject to a limited authorised market-maker exemption). ASIC's move has been made in response to announcements by overseas regulators including the US, the UK and now France, Germany, Switzerland, Ireland and Canada. The changes have been implemented by two new class orders and are effective immediately.
Background
Until now, subject to certain exemptions, section 1020B of the Corporations Act has banned the short selling of:
- securities;
- managed investments products;
- debentures, stocks or bonds issued by a government; or
- certain warrants;
unless the seller of the product "has a presently exercisable and unconditional right to vest the products in the buyer" (Covered Short Sale).
Regulatory Guide 196 - Short Selling: Overview of Section 1020B (RG 196) states that "Covered Short Sale", requires that there is a "legally binding commitment" between the seller and the buyer that the seller will provide the buyer with legal title to the financial product on settlement. RG196 considers that the best evidence of a "legally binding commitment" will be a written confirmation for delivery into settlement and goes on to state that that an agreement between the parties to use their "best endeavours" to provide the buyer with securities is insufficient.
Two new class orders
On Friday, 19 September 2008, ASIC released Class Order 08/751 (CO 08/751). This was followed by Class Order 08/752 (CO 08/752) on Sunday, 21st September 2008.
CO 08/751 and CO 08/752 require financial services licensees to:
- ask clients selling "section 1020B products" on a financial market whether the sale is a "short sale";
- record (in writing or via electronic means) the client's response before selling securities;
- advise clients that all "naked" short selling is banned and all Covered Short Selling is also banned (subject to a limited authorised market-maker exemption) for the next 30 days (during which time ASIC will reassess whether or not to re-open Covered Short Sales).
Securities covered by this new law include:
- shares listed on the ASX,
- corporate debt securities able to be traded on licensed markets (including electronic trading platforms licensed as a market).
The Australian Office of Financial Management (AOFM) have been advised by ASIC that the prohibition of Covered Short Selling contained in CO 08/752 does not apply to the short selling of Commonwealth Government securities.
What does this mean for existing conditions?
The prohibitions contained in CO 08/752 do not apply to short positions or short sale orders entered into prior to 22 September 2008.
ASX Trading Participants are required to continue to comply with net Short Position Reporting requirements for positions entered into prior to the prohibition on short-selling. This includes Net Short Sale positions for Covered Short Sales.
What does this mean for ASX approved market makers?
ASX will contact all ASX Approved Market Makers directly to confirm your short selling status.
In addition, ASIC has advised that it will provide a "no action letter" to enable market makers to continue to hedge open positions arising from client business. It is anticipated that the terms of the "no action letter" will state that the prohibitions on Covered Short Sales will not apply to hedging a position or an order entered into prior to 22 September 2008 as part of its business of dealing as principal in equities, options or derivatives (whether OTC or exchange-traded) to fulfil orders received from clients or to respond to a client's request to trade, in each case before that date.
The "short sale volume rule" and "up-tick rules" continue to apply to "Approved Short Sale Products" and approved "Short Sale ETF designated products", however, at this time all products have been removed from these lists.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.