Overview

The Australian Securities and Investments Commission (ASIC) enacted ASIC Class Order [CO 09/01051] in 2009 under section 1020F(1)(a) of the Corporations Act 2001. This legislation addresses the problem of naked short selling of financial products, which the Corporations Amendment (Short Selling) Act 2008 sought to restrict. The policy objective is to ensure that certain forms of naked short selling can continue to facilitate the ordinary operation of the market. This class order reinstates the substance of exemptions that were previously in place in the Corporations Regulations, allowing for short sales of specific financial products such as certain exchange-traded options, unobtained financial products, and bonds issued by governments or certain corporate bodies valued over $100 million. The exemptions will take effect on the day regulations 7.9.79 and 7.9.80A of the Corporations Regulations are omitted.

Scope and Application

The ASIC Class Order [CO 09/01051] applies to individuals and entities involved in the financial markets, specifically those who engage in short selling of financial products. The class order is designed to provide exemptions from the prohibitions on naked short selling of financial products as outlined in section 1020B of the Corporations Act 2001. This Act operates nationally across Australia, impacting the financial industry by regulating certain forms of short selling. The exemptions provided by the class order include short sales involving exchanged traded options, short sales of unobtained financial products where the seller has the ability to obtain the products through options, and short sales of specific bonds issued by governments or certain corporate bodies. These exemptions aim to ensure the continued normal operation of financial markets while adhering to the general prohibition on naked short selling. The order operates in conjunction with the Corporations Regulations 2001, which may be amended to further refine the application of these exemptions.

Key Provisions

ASIC Class Order [CO 09/01051], made under section 1020F(1)(a) of the Corporations Act 2001, aims to address the short selling of certain financial products by exempting specific activities from the general prohibition on naked short selling. Under section 1020B of the Act, naked short selling is generally prohibited unless a person has a presently exercisable and unconditional right to vest the product in the buyer. However, the Corporations Amendment (Short Selling) Act 2008 removed most exemptions to this prohibition, and the Corporations Regulations 2001 were also to be amended accordingly. This class order reinstates certain exemptions to ensure the normal operation of the market. The class order applies to three specific situations where a person is exempt from the short selling prohibition. Firstly, it allows for the short sale of financial products that involve the giving or writing of certain exchanged traded options. Secondly, it permits the short sale of unobtained financial products if the person or their principal can obtain at least the number of shares of the same class by exercising exchange traded options at the time of sale. Lastly, it exempts the short sale of bonds issued by a government or certain bonds and debentures issued by a body corporate valued over $100 million. These exemptions closely mirror the existing provisions in regulations 7.9.79 and 7.9.80A of the Corporations Regulations, with an extension to include the short sale of unobtained financial products under regulation 7.9.79(2). The obligations imposed by this class order are primarily on those engaged in financial activities, particularly those who might otherwise be subject to the short selling prohibition. Financial entities and individuals involved in trading or short selling must ensure their activities comply with the exemptions outlined in the class order. This includes maintaining records and evidence to demonstrate compliance, such as the ability to exercise options or the value of the bonds and debentures involved. Failure to adhere to these exemptions may result in breaching the short selling prohibition. For breaches of the short selling prohibition, the Corporations Act provides for both civil and criminal penalties. Civil penalties can include substantial fines, with the exact amount depending on the nature and severity of the breach. Criminal penalties may apply for more severe violations, potentially resulting in imprisonment. The maximum penalties are not explicitly stated in the class order but are detailed in the relevant sections of the Act. Compliance with the exemptions and the prohibition on naked short selling is critical to avoid these penalties.