AUSTRALIA: ASIC publishes review on emergency Australia short selling measures

Monday September 24 2012

ASIC has published its review of measures taken at the height of the global financial crisis to temporarily restrict Australia short selling in Australia.

In September 2008 ASIC took steps to temporarily restrict covered Australia short selling in the Australian market and to implement an interim reporting system for permitted short sales. ASIC introduced the ban on Australia 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.

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.

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.

The temporary ban on covered short selling in Austrailia 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).

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