House of Representatives

Corporations Amendment (Short Selling) Bill 2008

Second Reading Speech

Mr Bowen (Minister for Competition Policy and Consumer Affairs, and Assistant Treasurer)

I move:

That this bill be now read a second time.

Today I introduce a bill which will amend the Corporations Act 2001 to address certain aspects about the regulation of short selling.

The bill contains three key short-selling measures to enhance the integrity, fairness and transparency of our markets.

First, the bill clarifies the powers of the Australian Securities and Investments Commission (ASIC) to regulate short selling. Currently, ASIC has the power to modify certain parts of the Corporations Act through declarations. These declarations are commonly known as ASIC class orders.

To avoid doubt, the amendments make it clear that ASIC has the power to regulate all aspects of short selling including prohibiting these transactions and imposing or varying requirements on these transactions. The changes also mean that ASIC can regulate transactions that have a substantially similar market effect as short sales.

The recent international financial turmoil has highlighted the need for the regulator to be able to quickly respond to issues that could potentially threaten the fair and orderly operation of our markets.

In September 2008, ASIC used its power to make various declarations in relation to short selling. 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 declarations were made in light of the unprecedented volatility being experienced on Australian and global financial markets, and international regulatory developments occurring at the time.

As part of clarifying ASIC's short-selling powers and to avoid any doubt over ASIC's actions, the bill expressly states that the declarations made by ASIC in relation to short selling were within the scope of its power.

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.

The second measure, in effect, bans naked short selling. Typically, this will mean the seller will need a legally-binding securities lending agreement before making the short sale.

The government has taken action in this area because transactions of this nature have a higher risk of settlement failure because there are no available securities at the time of sale. In addition, naked short selling may also distort the operation of financial markets by causing increased price volatility and potentially facilitate market manipulation. Furthermore, the perceived activity of naked short sellers may damage market confidence, particularly among retail investors.

Community expectations on what is acceptable with regards to short selling, plus the need to protect Australian companies and retail investors from unjustified targeting and abusive short selling are also important policy considerations in this regard.

ASIC has the ability to grant exemptions from the naked short-selling prohibition. The government foresees the ASIC exemptions may allow some non-speculative naked short sales. Given the dynamics of the market and the rapid changes in the conduct and structure of financial markets, the government considers that these exemptions are more appropriately facilitated by ASIC, rather than by law.

The third measure will ensure the disclosure of covered short sales. The measure is primarily about transparency. Earlier this year, it became apparent that complete data on the level of covered short selling was not publicly available and that legislation was required to address the issue.

The uncertainty surrounding the activity of covered short sellers in Australian securities is having a significant impact on Australian capital markets. We have seen significant price declines in some shares, which have caused considerable rumour and speculation about the role of short selling. This speculation is affecting confidence in the market, particularly among retail investors.

Under the disclosure regime, a seller will be required to disclose covered short sales to their executing broker. The broker will in turn be required to disclose this client information to the market operator. Brokers trading on their own behalf will be required to disclose their own covered short sales directly to the market operator. It will be an offence not to disclose. Regulations will set the timing and manner of the disclosures.

The market operator, for example, the ASX, must publicly disclose the short-sale information it receives. To complement the disclosure requirement, and ensure clients understand their obligations, brokers must also ask clients if the sale is a covered short sale before making the sale.

Details of the timing and manner of disclosure are to be included in regulations. This will ensure the regime is able to adapt more readily to the ever-evolving market environment and the mechanisms by which transactions occur.

The disclosure of covered short sales will provide useful information to investors and regulators, contribute to pricing efficiency and also promote market confidence and integrity.

I commend the bill to the House.