ASIC has announced a package of interim measures relating to short selling following recent financial market turmoil.
This package has 3 goals:
- first, from the opening of the market on Monday 22 September 2008, naked short sales on ASX’s approved list in the cash equity market will not be permitted (see ASX announcement);
- secondly, ASIC has issued clarification of what are the covered short sales which will continue to be permitted;
- thirdly, for covered short sales which continue to be permitted, ASIC has introduced reporting requirements through the ASX.
These measures are to operate from opening of trading on Monday 22 September 2008 until the implementation of the Government’s foreshadowed amendments in relation to short selling.
What is a naked short sale
ASIC has released a Regulatory Guide on Short Selling (RG 196) that clarifies what constitutes a naked short sale.
The guide states that a naked short sale occurs unless the seller has ‘a presently exercisable and unconditional right to vest’. In ASIC’s opinion this means a legally binding commitment is required from another party such as a stock lender before the sale is entered into. ASIC will not accept an informal promise to locate stock before settlement day as sufficient for this purpose. Day traders, for example, will need stock to sell, before any sale.
What is permitted covered short selling
ASIC has clarified the meaning of covered short sales that will still be permitted: the seller must have a ‘presently exercisable and unconditional right to vest’. A short seller must have a binding stock lending agreement for specific stock in place.
What disclosure is required for covered short selling?
ASIC has exercised its power under s1020F of the Corporations Act to require disclosure of covered short selling effected by reliance on stock lending agreements for specific stocks (CO 08/751). This means a customer will be obliged to inform the broker that a transaction is a covered short sale of this type and the broker then must inform the ASX. The broker must ask the client if it is a covered short sale before taking the order.
ASX will report each morning on short sales that are reported to it for the previous day, consistent with its present reporting of naked short sales.
UPDATE 21 September: ASIC bans covered short selling
