ASIC CLASS ORDER [CO 09/39]
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 09/39] 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
People sometimes sell (short sell) securities which they do not own with a view to profiting by repurchasing them later at a lower price. One approach to facilitating this practice is for the people (the borrowers) to have in place an arrangement (a securities lending arrangement) whereby another person (the lender) makes securities available to settle the initial sale. Under the arrangement, the borrower will have an obligation to transfer equivalent securities to the lender at a later time. The practice of short selling securities with an arrangement of this kind in place is referred to as covered short selling.
In September 2008, ASIC responded to conditions in international and Australian financial markets by introducing measures aimed at limiting the potential for Australian markets to become disorderly due to short selling. Under ASIC Class Order [CO 08/751], ASIC prohibited covered short selling of all securities, managed investment products and stapled securities quoted on licensed markets in Australia, subject to certain exceptions. Where covered short selling is permitted, the short selling transaction is subject to a reporting regime in accordance with ASIC Class Order [CO 08/751].
ASIC lifted the ban on covered short selling of non-financial securities on 19 November 2008. ASIC indicated the ban on covered short selling of financial securities would remain in place until at least 27 January 2009. ASIC decided it was appropriate to extend the operation of the ban in January and again in March, given the conditions of the Australian and international markets. On 6 March, ASIC advised the market that the ban would continue under review until 31 May 2009.
2. Purpose of the class order
This instrument:
- removes the ban on covered short selling of financial securities; and
- makes technical amendments to clarify that disclosure and reporting apply to covered short sales as opposed to 'exempt covered short sales' as exemptions to permit covered short selling will not be needed once the ban is lifted.
The Act recognises that short selling has a legitimate role in the market. The ban on covered short selling was a temporary measure aimed at limiting the potential for the Australian markets to become disorderly due to short selling during a time of turmoil in the global financial markets. ASIC has now decided that that it is not warranted for the ban to continue. In reaching this decision, ASIC considered the current conditions of the Australian and global financial markets and the potential for aggressive or predatory practices via short selling. ASIC also had regard to the possible loss of some market efficiency or price discovery through the continuation of the ban.
3. Operation of the class order
This instrument varies ASIC Class Order [CO 08/751] by omitting notional s1020BD of the Act. Notional s1020BD prohibits the covered short selling of certain securities, subject to some exemptions. Upon commencement of this instrument, the prohibition no longer applies. The exemptions from the ban and related definitions are also omitted.
This instrument also makes two variations to the disclosure and reporting requirements. Firstly, it varies ASIC Class Order [CO 08/751] by removing references to 'a short sale' and 'an exempt covered short sale' at notional s1020BC(2) and (3) and their definitions at s1020BC(6). This is replaced with references to and definitions of a 'covered short sale'. The effect of this is that a participant in the market (broker) who receives a request to sell s1020B products is required to record whether the sale is a long sale or a covered short sale (instead of whether the sale is a long sale, short sale or an exempt covered short sale). The person (client) making the request must inform the broker which of the two types of sales is being requested. As before, if the client does not volunteer this information, the broker is required to ask.
The instrument also varies ASIC Class Order [CO 08/751] by amending the definition of 'reportable short sale' in notional s1020BC(6). The effect of this is that brokers will be required to report each day to the ASX by 9am the following trading day the total number of products sold pursuant to covered short sales and naked short sales that occur as a result of the exercise of an ASX exchange traded option.
4. Documents incorporated by reference
No documents are incorporated by reference.
5. Consultation
ASIC received input from industry representative bodies and other regulators before making this instrument.
Overview
The Australian Securities and Investments Commission (ASIC) introduced ASIC Class Order [CO 09/39] under Section 1020F(1)(c) of the Corporations Act 2001 to address the gap left by the temporary prohibition on covered short selling of financial securities. This temporary ban, which was initially implemented in response to the financial turmoil in September 2008, aimed to prevent market disorderliness due to short selling practices. As the conditions of the Australian and global financial markets stabilised, ASIC determined that the continuation of the ban was no longer warranted. The primary objective of this class order is to remove the prohibition on covered short selling of financial securities while simultaneously making technical amendments to clarify the application of disclosure and reporting requirements to covered short sales.
ASIC's decision to lift the ban was based on an assessment of current market conditions and the potential impact on market efficiency and price discovery. By reinstating covered short selling, the class order seeks to balance the need for market stability with the legitimate role of short selling in financial markets. The order also modifies the definitions and reporting requirements to ensure brokers accurately distinguish between long sales and covered short sales, enhancing transparency and market oversight. ASIC consulted with industry representatives and other regulators before issuing this class order to ensure it met the needs of the market while safeguarding investor interests.
Scope and Application
ASIC Class Order [CO 09/39] applies to financial markets and participants within Australia, specifically those engaged in the practice of short selling securities through securities lending arrangements. The order primarily targets brokers and other market participants who facilitate covered short selling transactions. Geographically, it operates within the Commonwealth of Australia and applies to activities conducted on licensed markets. The class order lifts the previously imposed ban on covered short selling of financial securities, which was implemented under ASIC Class Order [CO 08/751] to address market disorder during the global financial crisis. The order includes technical amendments to clarify that disclosure and reporting requirements apply to all covered short sales, removing distinctions between covered short sales and exempt covered short sales, thereby ensuring consistent application of reporting obligations. Additionally, the order specifies that brokers must accurately record and report covered short sales, distinguishing them from long sales. This legislative instrument extends the application of the Corporations Act 2001 by modifying existing provisions and clarifying the scope of short selling activities, without introducing any new substantive exclusions or exemptions beyond the already established reporting requirements.
Key Provisions
The main provisions of ASIC Class Order [CO 09/39] primarily involve lifting the ban on covered short selling of financial securities and modifying the disclosure and reporting requirements for such activities. Under section 1020F(1)(c) of the Corporations Act 2001, ASIC has the authority to declare that Part 7.9 of the Act applies to a person as if certain provisions were omitted, modified, or varied. The class order, therefore, removes the prohibition on covered short selling of financial securities, which had been in place since September 2008 as a temporary measure due to market turmoil. It also updates the definitions and reporting requirements to reflect the changes in the regulatory environment. Specifically, it omits notional section 1020BD of the Act, which previously prohibited covered short selling, and modifies the definitions and reporting criteria to differentiate between long sales and covered short sales.
The obligations imposed by this class order on the parties involved include ensuring that brokers record and report covered short sales accurately. Brokers must determine and record whether a sale is a long sale or a covered short sale, based on the client's information or by inquiring if the information is not provided. Additionally, the client must inform the broker of the type of sale being requested. These obligations are intended to maintain transparency and integrity in the securities market. The modifications also require brokers to report the total number of products sold through covered short sales and naked short sales daily to the Australian Securities Exchange (ASX) by 9 am the following trading day.
Breaches of the obligations and requirements set out in this class order may lead to civil or criminal consequences. Although the specific penalties are not detailed within the explanatory statement, breaches of similar provisions under the Corporations Act 2001 can result in significant fines for both individuals and corporations. For example, individuals may face fines of up to $222,000 or imprisonment for up to five years, while corporations may incur fines of up to $1,110,000. These penalties underscore the importance of compliance with the obligations and requirements outlined in the class order.