ASIC Class Order [CO 10/111]

Administered by Department of the Treasury

Legislation au F2010L00484 Not in force Legislative Instrument

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ASIC CLASS ORDER [CO 10/111]

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 10/111] under s1020F(1)(a) of the Corporations Act 2001 (the Act).

Section 1020F(1)(a) provides that ASIC may exempt a person or a class of persons from specified provisions of Part 7.9 of the Act.

1. Background

Deferred purchase agreements

A deferred purchase agreement (DPA) is a structured product.

Under a DPA, an investor agrees to purchase from the DPA issuer nominated ‘delivery products’, typically, listed securities or managed investment products. The investor pays the purchase price to acquire the delivery products at the time they enter the DPA but the delivery products are not delivered until a later date (maturity), being at least 12 months after the date the investor entered into the DPA.

The number of delivery products the investor will receive at maturity (and therefore, the value of the DPA) is determined by reference to the performance of a nominated ‘reference asset’. The reference asset may be some other financial product (other than a derivative that relates to the delivery product), an asset, a rate, an index or a commodity.

At maturity, to meet its obligations under the DPA, the issuer acquires sufficient delivery products to deliver to the investor. After maturity, and until the investor accepts delivery of and sells the delivery products, the investor has a long exposure to the delivery products.

Naked short sale prohibition: s1020B(2)

Section 1020B of the Act regulates the short selling of certain financial products. ‘Naked’ short selling is prohibited in Australia. As such, a person selling section 1020B products must, at the time of sale, have ‘a presently exercisable and unconditional right to vest’ the products in the buyer.

A person is taken to sell section 1020B products if they purport to sell the products: s1020B(7). Accordingly, a DPA issuer is taken to sell delivery products to an investor at the time a DPA is agreed, even though the products are not delivered until after maturity of the DPA.

The sale of delivery products under a DPA would contravene s1020B(2) if, at the time of the sale, the DPA issuer does not have a presently exercisable and unconditional right to vest the delivery products in the investor.

2. Purpose of the class order

The purpose of the class order is to provide limited relief to DPA issuers from s1020B(2) of the Act in relation to a sale of delivery products under a DPA. The class order relief does not extend to DPA issuers' hedging activities in relation to their exposures to reference assets.

In order to comply with the current law, DPA issuers would be required to hold an inventory of delivery products at the time of sale and for the full term of the DPA. DPA issuers say this would be impractical and commercially unviable for them because:

DPA investments generally have a term of over 12 months;
the exact number of delivery products required to be delivered to the investor cannot be calculated until maturity of the arrangement; and
the cost of holding an inventory of delivery products in long anticipation of the deferred delivery date of the DPA would be prohibitive.

Relief is limited to circumstances designed to reduce the risk of delivery failure or any market impact that would damage market confidence or integrity in a way that is inconsistent with the policy behind the naked short selling prohibition. In this regard, relief would only apply where the issuer has the ability to substitute the delivery product with another in specified circumstances (thereby addressing the risk of the delivery failure). In addition, relief is limited so that it would not apply where the reference asset is the same as the delivery product, or where the reference asset is a derivative that relates to the delivery product.

3. Operation of the class order

Class Order [CO 10/111] exempts persons from having to comply with subsection 1020B(2) of the Act in relation to the sale of a security (delivery product) or managed investment product (delivery product) that is able to be traded on the financial market operated by ASX Limited and where there is an agreement specifying that:

the delivery products sold will be delivered at least 12 months after entering into the agreement;
the number and value of the delivery products to be delivered are to be ultimately determined or derived from the value or amount of one or more of other financial products (other than a derivative that relates to the delivery products), or an asset, a rate (including an interest rate or exchange rate), an index or a commodity;
the DPA issuer has the right, in circumstances set out in the agreement, to instead deliver other securities or managed investment products where the securities or products are, at maturity, in a class of financial products that is a constituent of the index known as the S&P/ASX 200.

The exemption commences on the date the instrument is registered.

4. Documents incorporated by reference

No documents are incorporated by reference.

5. Consultation

ASIC informally consulted with the Australian Financial Markets Association before making this instrument. Given the minor and technical nature of the exemption, no general public consultation was undertaken.

Overview

The ASIC Class Order [CO 10/111], made under section 1020F(1)(a) of the Corporations Act 2001 by the Australian Securities and Investments Commission (ASIC), was introduced to address the impracticality faced by deferred purchase agreement (DPA) issuers in complying with the prohibition on naked short selling. Under the Corporations Act, DPA issuers are required to hold an inventory of delivery products at the time of sale and for the full term of the DPA. However, this requirement is considered commercially unviable due to the long-term nature of DPA investments, the uncertainty in calculating the exact number of delivery products needed, and the prohibitive cost of holding an inventory in anticipation of the delivery date. The class order provides limited relief to DPA issuers, permitting them to comply with the Act's requirements in specified circumstances that reduce the risk of delivery failure, thereby maintaining market confidence and integrity. The policy objective of the class order is to strike a balance between regulatory compliance and commercial viability for DPA issuers.

Scope and Application

The ASIC Class Order [CO 10/111] applies to DPA issuers who engage in the sale of deferred purchase agreements under the Corporations Act 2001. The exemption from certain provisions of the Act applies specifically to those involved in the issuance of deferred purchase agreements, which are structured financial products where investors agree to purchase specified delivery products at a future date. This class order primarily targets entities that issue these agreements, ensuring they are not subject to compliance requirements that would otherwise be impractical and commercially unviable for them to meet, such as maintaining an inventory of delivery products for the entire term of the agreement. The exemption is confined to the context of DPA issuers' core business activities and does not extend to their hedging activities. Geographically, the class order applies within the Australian jurisdiction as it operates under the Corporations Act 2001, which is a Commonwealth Act. There are no specific exclusions or thresholds mentioned in the explanatory statement; however, the relief is limited to ensuring that the substitution of delivery products does not involve the same product or a derivative related to the delivery product, thereby maintaining the integrity of the market. The class order itself does not extend or restrict application through subordinate instruments.

Key Provisions

The ASIC Class Order [CO 10/111] under section 1020F(1)(a) of the Corporations Act 2001 provides relief to certain entities from the prohibition on naked short selling in relation to deferred purchase agreements (DPAs). This class order specifically addresses the impracticality and commercial unviability of requiring DPA issuers to hold an inventory of delivery products for the full term of the DPA, given the long-term nature of these investments and the inability to determine the exact number of delivery products required until maturity. The exemption applies to securities or managed investment products traded on the ASX market, where delivery is deferred for at least 12 months, and the value of the delivery products is determined by a reference asset, such as an index or commodity. Importantly, the exemption only applies where the DPA issuer has the right to substitute the delivery product with another in specified circumstances, thereby mitigating the risk of delivery failure. The obligations imposed by this class order are primarily on DPA issuers, who must ensure that their DPAs meet the specific criteria outlined in the exemption. This includes having an agreement that specifies the delivery period, the method of determining the number and value of the delivery products, and the conditions under which the DPA issuer can substitute the delivery product with another. These obligations are designed to maintain market integrity and confidence by ensuring that DPA issuers can meet their obligations under the DPAs without incurring prohibitive costs or risks. Breaching the terms of this class order can result in serious consequences for the DPA issuer. Although the class order itself does not specify penalties, breaches of the Corporations Act 2001, which this class order is intended to complement, can result in both civil and criminal penalties. For instance, contravening the naked short sale prohibition under section 1020B(2) can lead to substantial fines and, in severe cases, imprisonment. The exact penalties depend on the nature and severity of the breach, but they can include fines of up to $222,000 for individuals and significantly higher amounts for corporations, along with potential imprisonment terms. In summary, the ASIC Class Order [CO 10/111] provides a tailored exemption for DPA issuers from the naked short sale prohibition, allowing them to operate within certain parameters while still adhering to the overarching policy of maintaining market integrity. The class order imposes specific obligations on DPA issuers to ensure compliance with its terms, and failure to adhere to these obligations can result in significant legal and financial repercussions.

Area of Law: Corporate Law & Governance
Instrument: Regulation
Concepts: Definitions & Interpretation; Exemptions & Exclusions; Regulatory Standards

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Sourced from the Federal Register of Legislation at 26 August 2026. For the latest information on Australian Government law please go to https://www.legislation.gov.au.

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