ASIC has issued further clarification to market participants regarding the prohibition on short-selling first announced on Friday 19 September and Sunday 21 September and clarified on Monday 22 September. ASIC may further change its position depending on market conditions.

Summary of position

Prohibition

ASIC has prohibited naked and covered short selling of all securities, managed investment products and stapled securities quoted on licensed markets in Australia, subject to certain exceptions (see below). This prohibition came into effect on 19 and 22 September 2008.

Permitted exceptions

The prohibition on covered short sales does not apply to the following:

• Hedging for existing positions

ASIC has provided relief for hedging of pre-22 September positions of market makers arising from their client business, to the effect that the prohibitions on covered short sales will not apply to hedging a position that was taken by an entity prior to 22 September 2008 as part of its business of dealing as principal in equities, options or derivatives (whether OTC or exchange-traded) to fulfil orders received from clients or to respond to a client’s request to trade, in each case before that date.

• Dual listed entities

ASIC has provided relief to enable persons engaging in arbitrage transactions in relation to the securities of dual listed entities to make covered short sales of the relevant securities in Australia.

• All exchange-traded options

ASIC has provided relief for sales resulting from the exercise of
exchange-traded options issued before or after 22 September 2008.

• Index arbitrage transactions

Covered short sales as part of an index arbitrage are not currently permitted under ASIC’s class orders. However, ASIC considers index arbitrage transactions that are unlikely to be a mechanism for market abuse should be allowed. ASIC has provided relief that will apply to index arbitrage.

• Market makers

Certain covered short sales made by market makers are exempt from the prohibition relating to covered short sales. ASIC has determined to widen the relief for market makers in line with overseas decisions. ASIC will provide relief for transactions that satisfy all of the following requirements:

a) the market maker must be an entity that makes a market as set out in section 766D of the Corporations Act 2001

b) the market maker must hold an Australian financial services licence relating to making a market or relies upon an exemption so it does not need an Australian financial services licence;

c) the covered short sale is a bona fide transaction to manage the entity’s risk arising from its market making activities; and

d) the market maker must not enter into a short sale in respect of a product if it knows the client’s transaction for which it is making the market will result in the client or counterparty establishing or increasing an economic net short position in respect of a product covered by the ASIC Class Orders.

Therefore the market makers exemption will cover some activities such as:

a) client facilitation ie. selling stock to a client thereby “filling” the client demand at a price which is certain, prior to the broker covering the position in the market (at the broker’s own risk);

b) hedging certain OTC equity swaps;

c) guaranteeing VWAP to a client, where the broker will short throughout the day and then cross with the client at the end of day at guaranteed VWAP price; and

d) enabling market making to hedge CFD products where the client holds a long position.

• Covered short sales to manage risk associated with underwriting of dividend reinvestment plans, share purchase plans and convertible bonds and hybrids

Where covered short sales occur to manage risk of underwriting these corporate transactions at the request of the relevant entity, ASIC will grant relief.