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Wednesday 7 January 2009

AD09-02 Continuation of exemptions in relation to naked short selling

This advisory relates to naked short selling only. It does not affect ASIC's current ban on covered short selling of financial securities.

In relation to covered short selling of financial stocks, the position remains as set out in ASIC Media Release (MR 08-210) of 13 November 2008, that the ban will remain in place until the 27 January, 2009.

For further details about the ban, please refer to the ‘Short Selling’ section on ASIC’s Notice Board: www.asic.gov.au.

ASIC has today confirmed that certain naked short selling exemptions will continue after the Government’s law reform to ban naked short selling comes into effect.

Background

The Corporations Amendment (Short Selling) Act 2008 effectively bans naked short selling.

Certain exemptions to the prohibition exist. Prior to this amending Act, exemptions from the prohibition on naked short selling could be found in:

  1. the Corporations Act 2001 (Corporations Act);

  2. the Corporations Regulations 2001 (Corporations Regulations); and

  3. ASIC relief.

Current status

From 8 January 2009, the Corporations Amendment (Short Selling) Act 2008 will remove all but one of the exceptions contained in the Corporations Act.

A copy of the Corporations Amendment (Short Selling) Act 2008 can be found at http://www.frli.gov.au/.

Summary of continuing exemptions

ASIC has power under s1020B(2) of the Corporations Act to grant relief from the naked short selling prohibition. The Government has noted ASIC’s power to give relief from the ban in limited circumstances necessary for the orderly operation of markets.

Today’s class order ensures that exemptions currently in the Corporations Regulations continue to apply. This class order is contingent upon and will not take effect until relevant regulations are omitted as is expected to occur in the first part of 2009.

These exceptions relate to:

(a) The giving or writing of certain exchange traded call options.

Without relief, a person cannot write or give a call option without holding the underlying security or entering into a securities lending agreement because of s1020B(7). The practice of giving and writing of options occurs in options markets internationally and is significant in ensuring a degree of liquidity in the options markets.

(b) Unobtained financial products.

The exemption allows the seller to obtain the relevant financial products by exercising an exchange traded option. This practice does not create a net economic short position or involve significant settlement risk. This exemption varies slightly from existing relief under the Corporations Regulations in that it also extends to unobtained financial products (not just shares).

(c) Certain corporate bonds, debentures and government bonds.

The exemption continues to allow naked short selling of certain bonds and debentures. These activities are essentially directed at professional markets and have low settlement risk.

Download ASIC Class Order (CO 09/1051).

ASIC also confirms that the no-action position announced in ASIC Advisory (AD 08-23) ‘No action position for owners selling from stock lending portfolios’ continues.

Consequential amendments to ASIC Class Order (CO 08/751)

As the Corporations Amendment (Short Selling) Act 2008 will remove certain naked short selling provisions currently in the Corporations Act, references to these provisions in ASIC Class Order (CO 08/751) will become obsolete. CO 08/751 will be varied by ASIC Class Order (CO 09/1052) to remove these anomalies. The variation will apply from 8 January 2009 (when the amendments to the Corporations Act banning naked short selling take effect).

Download ASIC Class Order (CO 09/1052).

Last updated: 07/01/2009 12:00