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Monday 14 May 2018

18-135MR ASIC consults on short selling proposals

ASIC is seeking feedback on various proposals relating to both naked and covered short selling.

ASIC’s public consultation coincides with the sunsetting of a number of related class orders, providing an opportunity to review our regulatory approach to short selling.

Specifically, we are seeking feedback on our proposals to:

  • grant legislative relief to allow market makers of certain exchange-traded products to naked short sell units in an exchange traded fund or a managed fund in the course of making a market in those products.
  • grant legislative relief, in the context of corporate actions, to allow naked short sales of unissued products during a deferred settlement trading period.
  • grant legislative relief to allow naked short sales in connection with initial public offering (IPO) selldowns made through a special purpose vehicle (where existing shareholders of a company sell their shares through a special purpose on the condition that the company conducting the IPO is listed on the ASX).
  • change the relevant time that short positions are calculated.
  • remake a number of short selling class orders that are due to ‘sunset’.

Following consultation, ASIC aims to consolidate all short selling-related relief into a single instrument.

ASIC Commissioner Cathie Armour said, ‘It is important that short selling continues to be regulated appropriately so that our market remains orderly and transparent. The proposals strike a balance between providing efficiency and certainty and reducing the burden of compliance for businesses, and managing the risks that short selling poses to market integrity.’

The paper covers a broad range of proposals. While ASIC welcomes feedback on all our proposals, we will accept responses that only address specific aspects of the consultation paper and are relevant to a business.

ASIC invites submissions on CP 299 by 20 June 2018, with a view to issuing a final consolidated instrument before 1 October 2018.



Short selling in Australia

Short selling is regulated by the Corporations Act and the Corporations Regulations. Short sales may be either ‘naked’ short sales or ‘covered’ short sales. In general, ‘covered’ short sales are short sales made in reliance on an existing securities lending arrangement. Covered short sales are permitted but subject to certain reporting and disclosure obligations. ‘Naked’ short sales are prohibited, however, we have the power to issue exemptions from this prohibition. Our current policy on short selling is set out in Regulatory Guide 196: Short selling.

Class orders due to ‘sunset’

Under the Legislation Act 2003, all class orders are repealed automatically or ‘sunset’ after a period of time (mostly 10 years) unless we take action to preserve them. This ensures that legislative instruments like class orders are kept up to date and only remain in force while they are fit for purpose and relevant.

In 2008, the Government passed the Corporations Amendment (Short Selling) Act 2008 and other amending regulations. This, together with a number of ASIC class orders issued around that time, provides for the current short selling reporting and disclosure framework in Australia. Some of these class orders are due to ‘sunset’.

While the expiry of the short selling class orders range from 1 October 2018 to 1 October 2020, we are reviewing these class orders concurrently so that the short selling regime can be considered as a whole.

Most class orders will be remade without significant change. However, in remaking ASIC Class Oder [CO 09/774], we propose to slightly extend the scope of relief to apply to naked short sales of STW ETF made for the purpose of hedging listed options over the STW ETF. We also clarify the operation of [CO 09/774] in relation to pre-emptive hedging.

Legislative relief for ETP market makers

Since 2008, we have given individual no-action positions to allow market makers of certain exchange traded products to naked short sell. This is set out in Regulatory Guide 196: Short selling. The proposal recognises the important role that ETP market makers fulfil in providing liquidity to the markets.

We now consider that it is an appropriate time to consult on legislative relief. We see our policy on this relief to be well settled.

The instrument of relief will include some additional conditions not previously included in our standard no-action letters. These additional conditions are intended to ensure that we can still achieve our regulatory outcomes where we no longer consider matters on a case-by-case basis.

Deferred settlement trading

Various corporate actions can result in the issue of products, including securities, to specified persons, such as existing shareholders. These products may commence trading on a licensed market before they are issued, on a deferred settlement basis. In some circumstances, the listing market operator may declare a conditional market, which means that official quotation commences on a conditional and deferred settlement basis, pending the satisfaction of certain conditions. The sale of unissued products during these periods is arguably in breach of the naked short selling prohibition.

In December 2017, we adopted a limited no-action position for trading in unissued section 1020B products during a deferred settlement period. We are now proposing to grant legislative relief in these circumstances.

We do not propose to grant legislative relief for conditional markets because we cannot predict the range of conditions that may apply. Our preliminary view is that individual relief on a case-by-case basis is more appropriate. We are seeking feedback on this.

Our paper also seeks feedback on deferred settlement trading and conditional markets in general, if they should be permitted and/or whether changes should be made to improve and simplify the processes involved.

IPO sell downs

Often existing shareholders of a company seeking to list on ASX (‘listing company’) will seek to sell down some or all of their shares as part of the listing company’s IPO. Usually the sale offer to public investors is made by a special purpose company, typically called a ‘saleco’. If the saleco is not selling on behalf of the existing shareholders, the sale offer will contravene s1020B(2) because it will be conditional on ASX listing. This type of condition goes beyond the narrow exemptions set out in s1020B(4).

ASIC has granted individual relief for a few IPO sell downs and we consider legislative relief is appropriate because they do not involve the type of settlement or market integrity risk that s1020B is intended to prevent.

Changing the time short positions are calculated

Short positions are currently calculated as at 7pm Sydney time.

For global firms with trading desks that operate in a number of different time zones, the proposal will reduce compliance burden (by removing manual work arounds) and the risk of human error, without significantly affecting transparency to the market. ASIC will continue to publish the reports at T+4. We do not expect the proposal to impact domestic firms except by allowing ‘late’ bookings.

Any change to reporting should be applied consistently across industry to ensure data continues to be useful. The consultation paper provides industry with the opportunity to raise any concerns with the proposal.