Australia introduces new short-selling rules

Australia has put a new short-selling rule in place following the enactment of the Corporations Amendment (Short Selling) Act 2008 (Short Selling Act) in December.

 

The new regime bans naked short selling, orders a disclosure regime for permitted covered short selling, and a clarification and expansion of ASIC’s powers to limit, prohibit or impose additional conditions on short selling transactions.

Under the Corporations Act, naked short selling is banned (subject to limited exceptions). The Short Selling Act further limited the exceptions to the naked short sale ban, effective 8 January 2008.

There are a number of exceptions which include when the seller has already contracted to buy the relevant financial products at the time of the sale, and the purchase is only conditional on payment of consideration or receipt of transfer or title documents.

 

 Other exceptions include giving or the writing of certain exchange traded call options, and certain sales resulting from the exercise of exchange traded option or sales where the seller can obtain the sold financial products by exercising exchange traded options. Sales of corporate and government bonds where certain conditions are satisfied is also excluded.

A temporary ban by the ASIC on covered short selling of financial stocks has been extended from 27 January 2009 to 6 March 2009. Financial stocks are those comprising the S&P/ASX 200 Financials (including property funds) plus five other APRA regulated businesses.

 

 There are exemptions to the ban on covered short selling of financial stocks. This includes certain hedging by market makers in certain circumstances, various arbitrage transactions, hedging exposures arising from underwriting a dividend/distribution reinvestment plan or security/interest purchase plan, hedging exposures arising from being issued securities/interests on conversion of a convertible, and hedging of pre-22 September 2008 exposures.

Covered short selling of non-financial stocks is permitted subject to the disclosure rules. A permanent disclosure regime for covered short selling is expected within the next year.

The disclosure requirements will apply to both Australian and overseas sellers and it will be an offence to not comply with them.

Meanwhile, the UK Financial Services Authority has removed the ban on certain short selling of shares in UK financial companies from 16 January 2009. This follows on from the US Securities and Exchange Commission's removal of its short selling ban in October 2008.