Short Selling Disclosure Regulations

Financial Services Minister Chris Bowen has released Short Selling Disclosure Regulations attached to the Corporations Amendment (Short Selling) Act 2008. The Regulations require that share investors report covered short sale transactions to brokers as is currently the case, and in addition, effective 1 April 2010, report positional short positions to ASIC which will be aggregated and reported with a 4 day lag.

The acknowledgement of the value of positional reporting is commendable. However, retaining the transactional reporting requirement is difficult to understand given the cost involved and in view of the fact that it is partial and misleading (see earlier post).

The announcement is silent on how the positional information is to be conveyed, whether it is direct or via prime brokers/custodians as discussed in the 6 March Treasury Consultation Paper. How will foreign investors be enforced to provide data and how will ASIC achieve the aggregation task?

All this effort and expense to justify a mechanism designed to report positions that according to the Australian Treasury represent an upper limit of 4% of total market capitalisation. Once a record of short positions is established and proper analysis is conducted will the cost of this dual reporting approach be seen to be justified?

ASIC Removes Short Sale Ban

The short selling ban on Australian listed financial securities was finally lifted by the Australian Securities & Exchange Commission (ASIC) effective 25 May 2009. The ban on financials extended beyond the two month ban placed on all securities that was lifted on 19 November 2009, because of concerns about systemic risk associoated with financial securities.

With some stability resuming in financial markets, and presumably assured by the benefit of the new reporting on gross short sales introduced on 19 November 2009, ASIC weighed up the market efficiency benefits in lifting the ban.

ASIC reserved the right to reimpose the short sale ban without consultation if they deemed it necessary. Disturbingly, ASIC referred specifically to activity by "hedge funds and similar institutions" in the same paragraph, suggesting that hedge fund activity was somehow a potential threat to an orderly market. Yet there is no such evidence that short selling does have an adverse impact on share prices, let alone that hedge funds are specifically involved in such activities.

Still on the horizon is clarification about the the form of short selling reporting that will be adopted going forward and whether the partial and potentially misleading current gross short selling regime will be persisted with.