House of Representatives

Explanatory Memorandum

Circulated by the authority of the Minister for Superannuation and Corporate Law, Senator the Hon Nick Sherry

Chapter 2 Schedule 1 - Amendments commencing on Royal Assent

Outline of chapter

2.1 Schedule 1 of the Bill contains amendments to clarify ASIC's powers under the Corporations Act 2001 in relation to short selling.

Context of amendments

2.2 ASIC has the power under paragraph 1020F(1)(c) of the Corporations Act to omit, modify or vary certain parts of the Corporations Act through declarations. These declarations generally take the form of Class Orders issued by ASIC.

2.3 In September 2008, ASIC used this power to issue a declaration that required the disclosure of covered short sales. However, shortly after this declaration, ASIC took further action to ban covered short sales. The disclosure requirements applied to covered short sale transactions taking place because of the exceptions to the ban. This declaration was made in light of the unprecedented volatility experienced on Australian and global financial markets during this period and international regulatory developments occurring at the time. ASIC has since made a number of other declarations providing limited relief from the short selling ban.

2.4 ASIC's power to omit, modify or vary the Corporations Act through declarations is general in nature. Given that ASIC may be using these powers to respond to emergency situations, it is essential to address any possible uncertainty surrounding the scope of ASIC's powers. The amendments are designed to put the matter of ASIC's powers in relation to short selling beyond doubt.

Summary of new law

2.5 The Schedule contains two key reforms:

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The first reform amends ASIC's general exemption and modification power in section 1020F of the Corporations Act to clarify that it includes specific actions in relation to any form of short selling and transactions with a substantially similar market effect as short selling.

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The second reform amends the Corporations Act to expressly state that the declarations made by ASIC in relation to short selling were within the scope of its power to omit, modify or vary certain parts of the Act.

2.6 Both reforms are for the avoidance of doubt only.

Comparison of key features of new law and current law

Detailed explanation of new law

2.7 Item 1 of Schedule 1 to the Bill amends existing section 1020F of the Corporations Act to clarify the application of ASIC's powers under paragraph 1020F(1)(c) in relation to any form of short selling of financial products and transactions with the same or substantially similar market effect as a short sale of financial products. Transactions with a substantially similar market effect are not limited to transactions that occur on a market licensed under the Corporations Act. It may include transactions that occur off a licensed market if it can be proven that the transaction has the same or substantially similar market effect as a short sale transaction. [Schedule 1, item 1]

2.8 Item 1 clarifies the application of ASIC's powers under paragraph 1020F(1)(c) in relation these transactions. In particular, it amends section 1020F to state that ASIC has the power to make declarations:

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suspending, prohibiting or limiting these transactions;

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varying requirements under Part 7.9 that apply to these transactions;

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removing some or all requirements under Part 7.9 that apply to these transactions; and

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imposing requirements that apply to these transactions.

[Schedule 1, item 1]

2.9 The amendments are made for the avoidance of doubt and are intended to remove any uncertainty in relation to the application of ASIC's powers to short selling transactions and transactions with the same or substantially similar market effects as short sale transactions.

2.10 Item 2 of Schedule 1 to the Bill is designed to put beyond any doubt that the Class Orders specified in new subsection 1484(2) were validly made. These Class Orders were made by ASIC under paragraph 1020F(1)(c) of the Corporations Act. In substance, the Class Orders imposed a ban on covered short selling subject to limited exemptions and required disclosure in relation to the exempted transactions. The Class Orders were made publicly available by being published on the Federal Register of Legislative Instruments and on ASIC's website. Steps were also taken to through the Australian Securities Exchange to inform market participants. [Schedule 1, item 2]

2.11 The amendment is necessary, in order to put beyond any doubt that individuals who organised their affairs in accordance with the Class Orders have complied with the requirements of the Corporations Act and may, with confidence, continue to conduct their affairs accordingly. The Class Orders were publicly available and expressed to have valid and binding legal effect. The amendment operates for the benefit of parties who organised their affairs in accordance with the Class Orders, and will, importantly, provide certainty to business.

2.12 Further, new subsection 1484(3) puts beyond any doubt that Class Orders that are of substantially the same nature as the instruments mentioned in subsection 1484(2), and that are made after 24 October 2008 and before commencement of section 1484, are validly made. These Class Orders (if any) should be publicised in essentially the same way as the Orders specified in subsection 1484(2). The amendment also clearly alerts market participants to the future status of such Orders under the Corporations Act.

Application and transitional provisions

2.13 Item 1 of Schedule 1 applies from the date of commencement (that is, on Royal Assent). Item 2 of Schedule 1 applies on and from 19 September 2008. This is date on which ASIC issued its first declaration relating to short selling (it was subsequently lodged on the Federal Register of Legislative Instruments on 22 September 2008). [Schedule 1, item 2]