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ASIC Bans Short Selling - Update

ASIC has extended the ban on covered short selling for non-financial services for a further 28 days until 28 November 2008, when it is expected the ban will be lifted from opening of trading the next day. The ban will continue until 27 January 2009 for financial stocks (which includes entities in the S&P/ASX 200 Financial Index, property trusts and APRA supervised entities).

Further policy will be announced on disclosure and reporting arrangements to be effective from the lifting of the ban.

Previously, ASIC released a series of Class Orders and a new Regulatory Guide 196 banning short selling of securities on licenced markets effective from 22 September 2008.

Application

Securities covered by the ban include those able to be traded on licenced markets (including electronic trading platforms licenced as a market):

  • securities (e.g. shares)
  • managed investment products
  • stapled securities
  • corporate debt securities

Short selling ban does not apply to:

  • government securities
  • a limited exemption for market-makers for hedging positions for risk management of market making transactions and where the market-maker makes reasonable inquiries to ensure the client does not establish or increase an economic net short position
  • client facilitation: filling client demand prior to the broker covering the position in the market
  • hedging certain OTC equity swaps
  • guaranteeing VWAP to a client
  • hedge CFD products where the client holds a long position
  • a limited no action for hedging of pre-22 September 2008 exposures by market makers arising from their business of dealing as principal in equities, options or derivatives
  • an exemption for exercise of exchange traded options
  • an exemption for arbitrage of a security or product as part of a dual listed arbitrage transaction
  • an exemption index arbitrage transactions
  • an exemption for covered short sales to manage risk associated with underwriting of dividend reinvestment plans, share purchase plans, convertible securities and hybrids
  • a limited no action for the sale of securities from a securities lending program

However, disclosure is required where covered short selling is permitted.

What do you have to do now?

All service providers

  1. Financial services providers must ask a client placing a sell order whether this order is a short sale
  2. You must also ask a client who makes a sale as the result of the exercise of an ETO whether the sale would breach the short selling requirements but for the limited exemption in paragraph 4 of Class order 08/764
  3. You must record the client response in writing or electronically before selling securities.

ASX Trading Participants

The prohibition does not apply to short positions and short selling orders entered prior to 22 September 2008.

For existing reported net Short Positions as at 7.00pm Friday 19 September 2008, Trading Participants must ensure its Clearing Participant retains margin cover until the client has covered their short position by the delivery of replacement Cash Market Products to the lender.

Trading Participants are required to continue to comply with net Short Position Reporting requirements as Trading Participants will be reporting on positions accumulated prior to the prohibition of short-selling. This includes Net Short Sale positions for Covered Shrirt Selling. Trading Participants are required to upload their net Short Sale positions as at 7.00pm on the previous trading day via ASXOnline by no later than 9.00am on each trading day.

Trading Participants must also inform the market operator by 9.00am on each trading day their net ETO securities short position as at 7.00pm on the previous trading day.

ASX Market Makers and OTC Market Makers

There is exemption for market-makers:

  • holding an ASFL with market-making authorisation
  • position created in the course of making a market
  • the sale is a bona fide risk management transaction
  • an exemption index arbitrage transactions
  • market-maker makes reasonable inquiries to ensure the client does not establish or increase an economic net short position

This exemption is for the purposes of:

  • client facilitation: filling client demand prior to the broker covering the position in the market
  • hedging certain OTC equity swaps
  • guaranteeing VWAP to a client
  • hedge CFD products where the client holds a long position

ASX ETO Market Markets or OTC Market Makers are permitted to covered short sell in the physical market for the purpose of hedging positions entered into in the course of market making.

ASX Market makers are required to continue to comply with net Short Position Reporting requirements. ASX has released a new procedure for ASX MR 19.6.1(c) and 19.6.2(c). for use from Tuesday 23 September 2008 or positions as at 7.00p,m on Monday 22 September 2008.

Short sale volume rule and up-tick rules apply to Approved Short Sale Products and approved Short Sale ETF designated products. However, all products have currently been removed from these lists.

Direct Market Access Providers:

ASIC will consider relief from reporting requirements from DMA service providers that use automated trading facilities for retail clients from a positive obligation of enquiry in relation to sell orders where the DMA operator knows from its systems that the client holds the shares subject of the automated trading. You must apply to ASIC for relief to receive a no action letter.

Derivatives:

ASX has confirmed that all Trading Participants are permitted to conduct both buy and sell transaction in all ASX Exchange Traded Options (ETO) put and call contracts. ASX ETO Market Markets or OTC Market Makers are permitted to covered short sell in the physical market for the purpose of hedging positions entered into in the course of market making.

Service providers who are not ASX ETO Market Markets or OTC Market Makers are permitted to buy and sell in the physical market but cannot engage in short selling.

From 23 September 2008 there is an exemption for the exercise of ETO registered with Australian Clearing House Pty Limited subject to reporting conditions.

Stock Lending Programs:

ASIC will not take action where the owner of securities and managed investment products in a stock lending program sells its securities where:

  • the seller made securities of the same type available to the lender and had full beneficial ownership of these securities
  • the seller is entitles to recall at least the number of securities from the program at the time of sale
  • before or as soon as practicable after the sale, the seller recalls in written or electronic form a sufficient number of securities from the program to settle the sale
  • the sale is settled at the time required by the market rules

Hedge Funds:

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 may no longer be implemented and that there is uncertainty as to when the ban on short selling will be lifted.

Further information

For advice on whether this may apply to you, and to help you understand your obligations, please contact your Certainty Consultant on (02) 9238 8091 or enquiries@certaintycompliance.com.au

ASIC Policy

  • CO 08/751 Covered short sales: CO 08/751
  • CO 08/752 Variation of Class Order CO 08/751: CO 08/752
  • CO 08/753 Variation of Class Order CO 08/751: CO 08/753
  • CO 08/763 Variation of Class Order CO 08/751: CO 08/763
  • CO 08/764 Short-selling - exercise of exchange traded option: CO 08/764
  • Regulatory Guide: 196 - Short-selling overview of s 1020B RG 196
  • AD 08-23 No action position for owners selling from stock lending portfolios: 08-204

ASX Circulars

  • Circular No: 2008/466 All products and ETFS removed from approved short sale products list and changes to covered short selling reporting requirements: Circular 2008/466
  • Circular No: 2008/467 Naked and Covered Short Selling is not permitted except for limited Authorised Market Maker Exemptions: Circular 2008/467
  • Short Selling - FAQs - 22 September 2008: FAQs
  • Circular No: 2008/468 Further clarification: Naked and Covered Short Selling is not permitted except for limited Authorsied Market Maker exemptions Circular 2008/468
  • Circular No: 2008/469 Amendment: Naked and Covered Short Selling is not permitted except for limited Authorsied Market Maker exemptions: Circular 2008/469
  • Short Selling - FAQs - 22 September 2008 FAQs
  • Circular No: 2008/470 Clarification regarding engaging in arbitrage transactions for dual listed companies: Circular 2008/470
  • Circular No: 2008/472 Clarification of Permitted Activity in the ASX ETO Market: Circular 2008/472
  • Circular No: 2008/474 ASX Market Rules Procedures Changes to New Short Position Reporting Requirements: Circular 2008/474
  • Circular No: 2008/481 No Action Position for Owners Selling from Stock Lending Portfolios: Circular 2008/474

Australian Government, Australian Office of Financial Mangement