ASIC today announced it had made a minor amendment to ASIC Class Order [CO 09/774] Naked short selling relief for market makers ([CO 09/774]), which will allow licensed market makers to short sell securities in the S&P/ASX300 index, in order to hedge risk. Previously, this was only allowed for securities that appeared in the S&P/ASX200 index.

While section 1020B of the Corporations Act 2001 prohibits naked short selling, licensed market makers have been afforded relief to enable them to mitigate the risks involved in their market making activities.

The remaining conditions in [CO 09/774] remain unchanged.

The amended class order commenced on 19 April 2011.

Download [CO 09/774] and see Regulatory Guide 196 Short selling (RG 196) for further information.

Background

In September 2008, as a result of volatility in markets across the world, including Australia, ASIC announced a series of measures relating to short selling. During this sustained period of volatility, ASIC restricted the relief given to market makers to ensure that liquidity and settlement risks were properly managed. A condition of the relief is that market makers have reasonable grounds to believe securities lending arrangements can be put in place to allow delivery and market makers acquire or borrow sufficient products by the end of each day to ensure that they can deliver all products sold during that day at the time delivery is due.

For the additional 100 stocks in the S&P/ASX 300, ASIC’s analysis indicates the liquidity and ease with which market makers can cover short positions are broadly in line with the S&P/ASX 200 stocks. As a result, the impact of the change is considered to be low with sufficient investor and market protections in place under the conditions of the relief to market makers.