ASIC modifies rules related to short selling

The Australian Securities & Investments Commission (ASIC) today announces that it has issued a new legislative instrument that offers various relief and modifies the laws in relation to short selling.

Let’s recall that a short sale occurs when a person sells a financial product that they do not currently own in the expectation that they can purchase the financial product later at a lower price. Covered short sales are permitted in Australia but subject to certain reporting and disclosure obligations.

‘Naked’ short sales are prohibited mainly due to the potential for disruptions to the market caused by the failure to deliver the products by the due date for delivery. However, ASIC has the power to issue exemptions from this prohibition. Usually, the regulator provides exemptions from the prohibition against naked short selling in circumstances where settlement risk is low and particularly in circumstances where the exemption may facilitate activities which benefit the market.

The new relief and modifications include:

• legislative relief for ETF market makers;
• deferred settlement trading;
• initial public offering (IPO) sell downs; and
• an option for global firms to calculate their short positions as at a global end calendar time.

The Short Selling Instrument provides legislative relief to permit ETF market makers to make naked short sales in ETFs and managed funds in the course of making a market in units in those funds. This relief facilitates market making which provides benefits of liquidity to the market. The settlement risk is low because the market makers have the ability to apply to the fund issuers for the creation of new fund units in time for the settlement of any short sales.

Regarding deferred settlement trading, ASIC explains that deferred settlement arrangements are established market practice and have operated without undue settlement risk. However, the sale of unissued products during these periods is arguably in breach of the naked short selling prohibition.

The regulator is now granting legislative relief in these circumstances which is included in the Short Selling Instrument.

ASIC is also granting relief in the Short Selling Instrument for conditional and deferred settlement trading that follows an initial public offering (IPO) or other public offer. This relief permits trading where the seller’s entitlement to the products is conditional on standard conditions that the Australian Securities Exchange (ASX) generally imposes under its operating rules. If these conditions are not fulfilled, under the operating rules all trades that occurred during the period are cancelled.

The Short Selling Instrument will also permit naked short selling in the context of IPO sell downs where a special purpose company or saleco offers shares to IPO investors before it has an unconditional right to those shares.

Furthermore, the modified rules are providing an option for global firms to nominate the global end calendar time for calculating their short positions.

Short positions are at present calculated as at 7pm Sydney time. The Short Selling Instrument will now provide an option for firms to nominate to calculate their short positions as at the global end calendar time.

A global end calendar time is the end of the trading day in the location in which the relevant transaction is booked in the short sellers’ accounts. This option is of particular relevance to global firms.

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 reports of short selling positions at T+4. The regulator does not expect the proposal to affect domestic firms as they continue to rely on the 7pm Sydney time.