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ASIC to lift ban on covered short selling for non-financial securities from 19 November 2008

ASIC has announced it will lift the current ban on short selling of non-financial securities from opening of trading on 19 November 2008.

The ban on covered short sales in financial securities will continue until at least 27 January next year. Financial securities are those comprising the S&P/ASX 200 Financials (including property funds) plus five other APRA regulated businesses.

The ban on naked short selling will continue indefinitely.

Existing exemptions for covered short selling will continue in relation to financials.

In Class Order 08/824, ASIC defines an exempt covered short sale as a short sale where at the time of sales, that person has a presently exercisable and unconditional right to vest the products in the buyer because of a securities lending arrangement entered into before that time and where one or more of s1020BD (2) to (6) apply to the sale and s1020BD(1A) does not apply to the sale.

Examples of exempt covered short sales include a short sale of a financial stock where the seller has entered into an enforceable securities lending arrangement and the transaction is a hedge by a market maker, a dual listed arbitrage transaction, an index arbitrage transaction, a hedge of underwriting a DRIP or purchase plan, a hedge of a conversion of a convertible security or a hedge of a pre-22 September exposure.

Reporting and disclosure arrangements

As outlined in our earlier news update, on 12 November ASIC and the ASX announced reporting and disclosure arrangements that will apply from 19 November 2008.

As a broker, what do I need to do?

Before 19 November 2008:

  • You should advise your clients that from 19 November you have an obligation to ask them whether a sale is a "long sale", "short sale" or "exempt covered short sale" and whether sales arising from the exercise of ETOs are short sales. You should advise your clients that you must also record the information they provide to you and report all short sales to the ASX.
  • ASIC suggests you may speed up this process by volunteering the type of sale transaction:
  • "sell long" for a sale transaction where you hold a stock
  • "sell short" for a sale transaction of a non-financial stock where you have an enforceable stock lending arrangement in place
  • "sell covered short under [insert description of applicable exemption]" for a sale transaction of a financial stock where you have an enforceable stock lending arrangement in place and one of the s1020BD exemptions applies to the transaction
  • You should also inform clients that you can’t execute an order if the client only identifies a transaction as a "sell" order.
  • You should advise the ASX via email to compliance@asx.com.au by no later than 5.00pm Tuesday 18 November that you have advised or have in place arrangements to advise your clients of this and will take reasonable steps to reinforce this obligation. A senior officer of the broker must be the one who provides this information to the ASX.

From 19 November 2008:

  • Before 9am on 19 November, the very last Net Short Sales report for Tuesday trades must be submitted via ASXonline (or email nil report emailed to compliance@asx.com.au).
  • Before market opens on 19 November, ensure that all brokers know the new short selling rules. Naked short selling continues to be banned. While covered short sales are permitted for non-financial stocks, the ban on covered short selling on financial stocks is still in place (with some exemptions). If in doubt on whether a stock is a financial stock consult the list on ASX Circular 561/08.
  • If you have clients who place orders electronically, you should ask these clients to confirm by email that they know the codes for the mandatory fields.
  • If the client does not volunteer that a sale is a "long sale", "short sale" or "exempt covered short sale" when they place the sale order, you must ask them. If they advise "exempt covered short sale" when they place the sale order, you must ask them which type (market maker, dual listed arbitrage, index arbitrage, underwriting or conversion). You should also ask clients whether sales arising from the exercise of ETOs are short sales.
  • You must record the information the client gives you about a sale. This record must be completed every sale and also you must be able to demonstrate to ASIC that you have done so.
  • Between 7am and 9am on 20 November, report short sales from 19 November on ASXonline. You are required to report gross short sales and nil reports through ASXonline. The data provided to ASX should include gross short sale activity at an individual stock level.
  • From then on, you are required to report to ASX by 9.00am each business day all short sales executed up to 7.00pm the previous trading day. This includes exempt short sales in securities in financials for which the short selling ban remains in place and naked short sales that arise from the exercise of exchange-traded options.
  • This reporting requirement will continue until such time as ASX Trading Participants are obliged to “tag” or identify all sell orders. Further information will be provided by the ASX shortly.

ASIC guidance

In its advice of 12 November 2008, ASIC has provided detailed guidance about how to fill in the fields available in commonly used dealing systems to assist brokers and direct market users to specify and receive sale order types. It advises how to record sales transactions for IRESS and FIX Protocol tag 54 with the correct value to indicate whether the type of sale, and procedures to follow when making telephone sales.

For more information see:

Regulatory Guide 196 Short Selling: Overview of s1020Bfor ASIC's view on what constitutes short selling

ASIC Advisory 08-65 on the lifting of the ban: www.asic.gov.au

ASIC market circular on disclosure and reporting requirements: www.asic.gov.au

ASX Circular 561 on disclosure and reporting requirements: www.asx.com.au