ASIC CLASS ORDER [CO 08/801]
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 08/801 under section 1020F(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 ASIC has prohibited covered short selling of securities, managed investment products and stapled securities quoted on licensed markets in Australia. This prohibition came into effect on 22 September 2008.
A covered short sale is a sale of securities by a person who does not own them but has a securities lending arrangement in place to settle the sale.
Under ASIC Class Order 08/751 there are certain exemptions from the covered short selling prohibition. One exemption is for persons who hold a convertible security (eg a convertible bond) to short sell for the purposes of hedging their exposure to the underlying security: notional section 1020BD(5)(b) inserted by ASIC Class Order 08/763.
2. Purpose of the class order
ASIC Class Order 08/801 expands the exemption under notional section 1020BD(5)(b) for persons who hold a convertible security. This variation to ASIC Class Order 08/751 means that persons can short sell to hedge exposure to the underlying security through a fixed conversion price or ratio convertible security. The exemption was previously limited to convertible securities where the number of shares issued on conversion is referable to the volume weighted average price (VWAP) of the share over a period.
There is a similar commercial need to hedge exposures as a result of holding a security that converts at a fixed price or ratio and a security that converts by reference to VWAP. The policy behind this covered short selling exemption is to facilitate fundraising by companies.
3. Operation of the class order
ASIC Class Order 08/801 varies notional section 1020BD(5)(b) so that the exemption applies to a sale of a security or product by a person for the purposes of managing, avoiding or limiting the financial consequences of being issued with securities or products on the conversion of a convertible security or convertible product. The paragraph omits reference to convertible securities that convert by reference to the VWAP.
4. Consultation
ASIC informally consulted with various industry bodies and participants on this variation before making the instrument. No general public consultation was undertaken given the technical (minor and machinery) nature of the change.
Overview
The ASIC Class Order [CO 08/801] was enacted by the Australian Securities and Investments Commission (ASIC) under the Corporations Act 2001, aiming to address a specific gap in the regulatory framework concerning covered short selling of securities. The primary objective of this class order was to expand the existing exemption for certain convertible securities, allowing for short selling to hedge exposure to the underlying security through fixed conversion price or ratio convertible securities. This change was made to accommodate the commercial need for hedging, thereby facilitating fundraising by companies. The class order modifies notional section 1020BD(5)(b), omitting the previous reference to securities converting by reference to the volume weighted average price (VWAP). ASIC informally consulted with industry bodies and participants before implementing this change, deeming general public consultation unnecessary due to the technical nature of the amendment.
Scope and Application
ASIC Class Order [CO 08/801] applies to persons holding convertible securities who engage in short selling activities for the purpose of hedging their exposure to the underlying securities, thereby extending the exemption under section 1020BD(5)(b) of the Corporations Act 2001. The class order modifies the previous exemption by removing the requirement that the number of shares issued on conversion must be referable to the volume weighted average price (VWAP) of the share over a period, thereby allowing short selling to hedge exposure to the underlying security through a fixed conversion price or ratio convertible security. This change is designed to facilitate fundraising by companies by providing a more flexible exemption. The class order has a national jurisdictional reach as it is issued under the Commonwealth authority of the Australian Securities and Investments Commission. It does not apply to other types of securities or products, and no general public consultation was undertaken due to the technical nature of the change. Any further implementation or modification of the class order can be effected through subordinate instruments issued by ASIC.
Key Provisions
The main operative sections of ASIC Class Order [CO 08/801] (section 1020F(1)(c) of the Corporations Act 2001) pertain to the regulation of covered short selling of securities, managed investment products, and stapled securities quoted on licensed markets in Australia. The Order modifies the exemption for certain short sales made for hedging purposes. Specifically, section 1020BD(5)(b) (as inserted by ASIC Class Order 08/763) is varied to expand the exemption to include short sales made to hedge exposure to underlying securities through fixed conversion price or ratio convertible securities, removing the previous limitation to securities that convert by reference to the volume weighted average price (VWAP). This amendment came into effect to facilitate fundraising by companies by allowing broader hedging activities.
The Act imposes obligations on entities that engage in covered short selling by defining and limiting the circumstances under which such activities are permissible. Persons holding convertible securities can now short sell to hedge their exposure, provided they adhere to the expanded exemption criteria. This includes ensuring that the short sale is made for the purpose of managing, avoiding, or limiting the financial consequences of being issued with securities or products on the conversion of a convertible security or convertible product. The regulation requires that these activities are transparent and conducted in accordance with the specified conditions to maintain market integrity and protect investors.
Failure to comply with the provisions of the Act and the Class Order can result in civil or criminal consequences. While the Explanatory Statement does not detail specific penalties, the Corporations Act 2001 generally provides for penalties including fines and imprisonment for breaches of its provisions. ASIC, as the enforcing authority, may take action against individuals or entities that do not comply with the Order, which could include legal proceedings, fines, or other regulatory actions as deemed appropriate. The seriousness of the breach and the impact on the market would be considered in determining the appropriate penalty.