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12-233MR ASIC reports on GFC short selling restrictions
A review of measures taken at the height of the global financial crisis to temporarily restrict short selling has been released by ASIC, revealing the impact of this action.
In September 2008 ASIC took steps to temporarily restrict covered short selling in the Australian market and to implement an interim reporting system for permitted short sales. As global financial markets experienced severe stress, countries around the world took steps to strengthen their financial systems. There was widespread concern that short selling was contributing to market volatility and putting enough pressure on market confidence to be systematically relevant to the global financial system and economy.
ASIC introduced the ban on short selling and a reporting system to maintain an orderly market and mitigate the risk of market abuse. ASIC’s actions were also intended to enhance confidence and integrity in the market by providing greater transparency, and to avoid potential extreme share price movements in the local market. There was concern that had Australia not acted as its international counterparts in the UK and USA, among others, were doing, this could have led to pressure on Australian markets.
ASIC Deputy Chairman, Belinda Gibson said the review found these measures, taken in exceptional circumstances, broadly met their regulatory objectives by reducing the risks that might have occurred as a result of unrestricted short selling.
‘At the height of the global financial crisis, we identified a significant risk that excessive, speculative short selling could have unwarranted, negative consequences for Australia’s markets and economy more broadly.’
‘ASIC was concerned that global market conditions, coupled with extensive short selling of stocks, particularly financial stocks, may have been causing unwarranted price fluctuations. If left unchecked, we were concerned that the fair and orderly operation of the stock markets may have been threatened’, Ms Gibson said.
Report 302 Short selling: Post-implementation review (REP 302) also acknowledges that the measures may have contributed to some adverse market characteristics, such as reduced liquidity and increased price volatility. The measures also imposed compliance costs on many firms.
‘While these effects would normally run counter to our objectives, the review concludes that the exceptional circumstances at the time – a market that was under severe strain because of unprecedented global events – were justified in order to reduce the risk of greater market disorder’, Ms Gibson said.
The report notes that, if a situation arises in the future that involves disorderly markets and action by regulators in other jurisdictions to further restrict short selling, it is likely that ASIC and the Australian Government would again contemplate a ban on short selling to bolster investor confidence and limit the potential for international regulatory arbitrage.
‘Over the past three years, ASIC together with other regulators and the market have developed a much deeper understanding of short selling and its impact on trading conditions, and any future calls for taking measures similar to those of September 2008 would have the benefit of the lessons learned from the 2008 bans’, Ms Gibson said.
The short selling disclosure regime will continue to provide detailed and timely information about short selling in the markets which will inform any future decisions about the need for a covered short selling ban in periods of market turmoil.
The temporary ban on covered short selling was lifted for non-financial stocks in November 2008 and the ban on covered short selling of financial stocks was lifted in May 2009. The interim reporting arrangements were superseded by the permanent disclosure framework established by the Corporations Amendment (Short Selling) Act 2001 and the Corporations Amendment Regulations 2009 (No. 8).
When ASIC implemented the short selling measures in September 2008, it was given an exemption from the Prime Minister from the requirement to complete a regulatory impact statement covering the measures. Instead, ASIC was required to complete a post implementation review of the impact of the measures. This report is the outcome of this review.
ASIC consulted with industry in preparing this report, inviting relevant industry associations to provide information about the effect of the short selling measures on their members.
Short selling is a practice in which someone sells a financial product in the hope of buying it back at a later date at a lower price than they sold it for. There are two types of short selling:
covered short selling, where the seller has borrowed the financial product which they short sell and therefore has an unconditional right to vest the financial product in the buyer, and
naked short selling, where the short seller has not borrowed the financial product in question and has no such right.
As part of the short selling measures taken during the global financial crisis, most naked short selling was permanently banned.
Report 302 Short selling: Post-implementation review (REP 302)
Regulatory Guide 196 Short selling (RG 196)