ASIC has this morning issued further clarification to market participants regarding the prohibition on short-selling to ensure that fair and ordinary markets continue. Following is a summary of announcements on Friday and Sunday and related clarifications.
Summary of position
Prohibition
ASIC has prohibited naked and covered short selling of all securities, managed investment products and stapled securities quoted on licensed markets in Australia, subject to certain exceptions (see below). This prohibition came into effect on 19 and 22 September 2008.
Permitted exceptions
ASIC has reviewed the operation of the market since its announcements and had opportunity to consult with ASX and industry. This document summarises decisions of ASIC to exempt some market operations from the short selling prohibition, in line with overseas developments. The prohibition on covered short sales does not apply to the following:
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Hedging for existing positions
ASIC has provided relief for hedging of pre-22 September positions of market makers arising from their client business, to the effect that the prohibitions on covered short sales will not apply to hedging a position that was taken by an entity 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.
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Dual listed entities
ASIC has provided relief to enable persons engaging in arbitrage transactions in relation to the securities of dual listed entities to make covered short sales of the relevant securities in Australia.
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All exchange-traded options
ASIC has provided relief for sales resulting from the exercise of exchange-traded options issued before or after 22 September 2008.
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Index arbitrage transactions
Covered short sales as part of an index arbitrage are not currently permitted under ASIC’s class orders. However, ASIC considers index arbitrage transactions that are unlikely to be a mechanism for market abuse should be allowed. ASIC has provided relief that will apply to index arbitrage.
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Market makers
Certain covered short sales made by market makers are exempt from the prohibition relating to covered short sales. ASIC has determined to widen the relief for market makers in line with overseas decisions. ASIC will provide relief for transactions that satisfy all of the following requirements:
a) the market maker must be an entity that makes a market as set out in section 766D of the Corporations Act 2001;
b) the market maker must hold an Australian financial services licence relating to making a market or relies upon an exemption so it does not need an Australian financial services licence;
c) the covered short sale is a bona fide transaction to manage the entity’s risk arising from its market making activities; and
d) the market maker must not enter into a short sale in respect of a product if it knows the client’s transaction for which it is making the market will result in the client or counterparty establishing or increasing an economic net short position in respect of a product covered by the ASIC Class Orders.
Therefore the market makers exemption will cover some activities such as:
a) client facilitation ie. selling stock to a client thereby “filling” the client demand at a price which is certain, prior to the broker covering the position in the market (at the broker’s own risk);
b) hedging certain OTC equity swaps;
c) guaranteeing VWAP to a client, where the broker will short throughout the day and then cross with the client at the end of day at guaranteed VWAP price; and
d) enabling market making to hedge CFD products where the client holds a long position.
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Covered short sales to manage risk associated with underwriting of dividend reinvestment plans, share purchase plans and convertible bonds and hybrids
Where covered short sales occur to manage risk of underwriting these corporate transactions at the request of the relevant entity, ASIC will grant relief.
Disclosure
Where covered short selling is permitted (in limited circumstances) the short selling transaction needs to be disclosed in accordance with ASIC Class Order [CO 08/751]. These reporting requirements are equivalent to end of trading day net short sale position disclosure under the ASX Market Rules. The reporting requirements came into effect on 19 September 2008, and apply to trading from 22 September 2008.
What are the reporting requirements for direct market access providers?
ASIC will consider individual applications for a no-action position relieving DMA (Direct Market Access) 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 the subject of the automated trading. The no-action position will be conditional on notifying clients that short sales are not permitted.
Do the ASIC class orders apply to government securities?
No. Relevantly, the prohibition applies to securities as defined in s761A. While these include debentures of a body, a government is not a body as defined in section 9. Accordingly, government securities are not included in the relevant definition of securities and thus are outside the scope of the ASIC class orders.
Will these ASIC exemptions change again?
The exemptions may change. ASIC will continue to monitor this market to ensure there is no misuse of the market maker and other exemptions to reinstate objectionable short selling behaviour. In particular ASIC will monitor the use of the exemptions in the CFD and options markets.
ASIC will also continue to coordinate its response in line with international developments. In that regard, ASIC is part of an international group of regulators (including US and UK) that meet daily as required.
End of release