ASIC has announced that it has extended its temporary ban on covered short selling of securities on the S&P/ASX 200 Financials and securities issued by Wesfarmers Limited, The Rock Building Society Limited, Wide Bay Australia Limited, Futuris Corporation Limited and Calliden Group Limited (Financial Securities) to 31 May 2009.
Background
The ban on covered short selling was originally implemented on 22 September 2008 and was lifted in relation to non-financial securities on 19 November 2008. The ban on covered short selling of Financial Securities was due to expire on 27 January 2009, however, ASIC extended the ban to 6 March 2009, citing increased volatility in financial and banking stocks overseas as the main reason for its decision.
Further extension
ASIC has now extended the ban to 31 May 2009, pursuant to its review of the continued volatility in overseas financial markets and potential damage from predatory practices. ASIC has acknowledged that the extension of the ban may result in loss of market efficiency or price discovery, but stated that this is justified in light of the current market circumstances and in its pursuit of market stability.
Covered short selling of non-financial securities is still permitted, and gross short sales must continue to be reported daily. The ban on naked short selling also remains in place.
Criticism of the short selling ban
ASIC’s decision to extend the short selling ban has been widely criticised as a creation of artificial barriers in the market. Given that the ban applies only to the Financial Securities, it has been argued that ASIC is forcing short sellers to focus on the other securities in the market.
The ban has also been labelled as a failure to provide price support, as since the ban on non-financial securities was lifted, the Australian market has fallen 14.3% and the four biggest Australian banks, National Australia Bank, Commonwealth Bank, Westpac Banking Corporation and Australia and New Zealand Banking Group have also been heavily sold down.
Additional comments
In an address to the ASIC summer school on 3 March 2009, Senator Nick Sherry, the Minister for Superannuation and Corporate Law, announced that the government and ASIC were aware of the use of a range of short selling-like instruments by some participants in the market, and would be monitoring this issue closely. This was reflected in ASIC’s media release dated 5 March 2009, which stated that it would take action against any conduct which sought to circumvent the short selling ban.
In his address, Senator Sherry also indicated that the regulations which are to be made under schedule 3 to the Corporations Amendment (Short Selling) Act 2008 will be released in the near future. These regulations will deal with obligations regarding the disclosure of information relating to short sales, and once they come into force, the disclosure regime set out in ASIC Class Order 08/751 will be withdrawn.
