ASIC CLASS ORDER [CO 08/75375--63]

EXPLANATORY STATEMENT

Prepared by the Australian Securities and Investments Commission

Corporations Act 2001

The Australian Securities and Investments Commission (ASIC) makes ASIC Class Order [CO 08/75375--63] under s1020F(1)(c) of the Corporations Act 2001 (the Act).

Section 1020F(1)(c) relevantly provides that ASIC may declare that Part 7.9 of the Act applies in relation to a person as if specified provisions were omitted, modified or varied.

1. Background

Under ASIC Class Order [CO 08/751] (as amended by ASIC Class Order [08/752] and ASIC Class Order [08/753]), ASIC has prohibited covered short selling of all securities, managed investment products and stapled securities quoted on licensed markets in Australia, subject to certain exceptions.  This prohibition came into effect on 22 September 2008.

Where covered short selling is permitted, the short selling transaction needs to be disclosed in accordance with ASIC Class Order [CO 08/751].  These reporting requirements are equivalent to end of trading day net short sale position disclosure under the ASX Market Rules.  The reporting requirements came into effect on 19 September 2008, and apply to trading from 22 September 2008.

ASIC Class Order [CO 08/752] was issued on Sunday 21 September 2008 to prohibit certain covered short selling of securities on licensed markets subject to a limited exemption for certain market makers.  This was done as a matter of urgency in response to turmoil on international financial markets, having regard to the actions taken by relevant overseas regulatory agencies in relation to short selling on their markets.  The prohibition was aimed at all financial products commonly regarded as securities traded on licensed markets.  This was evident from ASIC’s announcements at the time.

The Class Order as made may not have its intended effect as the applicable statutory definitions do not or may not apply to the securities of managed investment schemes such as property trusts, or what are commonly known as stapled securities (typically this is a managed investment product traded together with one or more other managed investment products or shares).Having consulted with the finance industry, ASIC has decided to permit certain market operations, despite the prohibition  in ASIC Class Order [CO 08/752] (as modified by ASIC Class Order [CO 08/753])on covered short selling, in line with overseas developments. 

2. Purpose of the class order

The purpose of ASIC Class Order [CO 08/75--]63] is to vary ASIC Class Order [CO 08/751] to allow certain covered short sales that are commonly used in ordinary commercial transactions to manage financial risk where there is a limited prospect of their misuse. by providing that the prohibition in notional s1020BD ASIC Class Order [CO 08/753] corrects the drafting anomaly described above.does not apply to certain market operations.

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3. Operation of the class order

Thise class order varies ASIC Class Order [CO 08/751] by amending notional s1020BD of the Act (added to that instrument by ASIC Class Order [CO 08/752] and amended by ASIC Class Order [CO 08/753]which also varies ASIC Class Order 08/751]). 

Section  1020BD prohibits the covered short selling of securities, managed investment products and stapled securities traded on licensed financial markets in Australia certain securities subject to a limited exemption for certain market makers.  Generally, This class order [CO 08/763] allows certain covered short sales by: e variations involvehas the following effect:

• insertsing an exception 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, operations or derivatives (whether OTC or exchange-traded) to fulfil orders received from clients or t:o respond to a client's request to trade, in each case;
•     insertsing an exception for arbitrage transactions in relation to the securities of dual listed entities to make covered short sales of the relevant securities in Australia;
•     insertsing an exception for covered short sales as part of an index arbitrage;
•     broadensing the exception provided for market makers by inserting an exception for transactions by market makers 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 (see question 4 below for description);

(b)   the market maker must hold an Australian financial services licence relating to making a market or rely 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; and

• insertsing an exception for covered short sales that occur to manage the risk of underwriting dividend reinvestment plans, share purchase plans and for certain holders of convertible financial productsbonds and hybrids at the request of the relevant entity.

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         adding references to managed investment products where necessary in s1020BD(1) and (2); and

         expressly ensuring that stapled securities are covered by adding a new definition of able to be traded to s1020BD(3).

The instrument commences on the date it is registered.  This is expected to be was [23]2 September 2008.

4. Documents incorporated by reference

No documents are incorporated by reference.

5. Consultation

ASIC informally consulted with various industry bodies and participants on 22 and 23 September 2008 before making the instrument.  No further general public consultation was undertaken given the urgency of the matter granting the exemptions to ensure the continued orderly operation of Australia's financial markets.

No consultation was undertaken as the instrument is of a minor or technical nature and required as a matter of urgency.