ASIC CLASS ORDER [CO 11/269]
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 11/269] under s1020F(1)(a) of the Corporations Act 2001 (the Act).
Paragraph 1020F(1)(a) provides that ASIC may exempt a person from specified provisions of Part 7.9 of the Act.
1. Background
Section 1020B regulates the short selling of certain financial products (section 1020B products). Section 1020B(2) states a person must not sell section 1020B products unless they believe on reasonable grounds that they have a presently exercisable and unconditional right to vest the products in the buyer.
Currently, by way of ASIC Class Order [09/774] Naked Short Selling relief for market makers ("CO 09/774"), a person does not have to comply with subsection 1020B(2) in relation to a sale of a security (or managed investment product) ("shorted product") by that person where, among other conditions, at the time of the sale, the shorted product is a constituent of the index known as the S&P/ASX 200[1].
2. Purpose of the class order
The purpose of CO 11/269 is to vary CO09/774 allowing market makers to naked short sell constituents of the S&P/ASX 300, rather than the S&P/ASX 200.
This amendment has been made on the grounds of:
- Liquidity – sufficient liquidity outside the S&P/ASX 200 and within the S&P/ASX 300 to ensure that settlement risk [is not an issue];
- Volatility – given the market is generally more stable than it was when the ASX 200 limit was put in place; and
3. Operation of the class order
This Class Order varies CO 09/774 by deleting the term 'S&P/ASX 200' at paragraph 4(e) and substituting it with 'S&P/ASX 300'.
4. Documents incorporated by reference
No documents are incorporated by reference.
5. Consultation
ASIC consulted informally with a number of market makers in relation to the amendment in this CO 11/269 and their feedback was supportive of the proposal to amend CO 09/774 to permit market makers to naked short sell constituents of the S&P/ASX 300.
Before making CO 09/774, ASIC consulted publicly, in Consultation Paper 106: Short Selling to hedge risk from market making activities (CP 106). Responses to CP 106 were published by ASIC in Report 167: Response to submissions on CP106 Short Selling to hedge risk from market making activities.
[1] Note: This index is compiled and calculated by Standard and Poor’s, a division of The McGraw-Hill Companies, Inc. Its constituents are subject to change from time to time. Details of the current constituents may be found via http://www.standardandpoors.com.au/.
Overview
The Australian Securities and Investments Commission (ASIC) Class Order [CO 11/269], enacted in 2011, modifies existing regulations concerning the short selling of financial products, particularly securities or managed investment products that are constituents of stock market indices. This Class Order was introduced to address the liquidity and volatility issues that may arise from naked short selling within the broader market, beyond the scope of the S&P/ASX 200. The order was enacted under section 1020F(1)(a) of the Corporations Act 2001, which empowers ASIC to exempt individuals from specified provisions of the Act. The policy objective behind CO 11/269 is to enhance market stability and liquidity by allowing market makers to engage in naked short selling for a broader range of securities, specifically those in the S&P/ASX 300, rather than restricting it to the S&P/ASX 200. This amendment was made following consultations with market makers and public feedback, which indicated support for expanding the scope of permissible naked short selling.
Scope and Application
ASIC Class Order [CO 11/269] applies to market makers, specifically those who are subject to the regulations concerning the short selling of certain financial products under the Corporations Act 2001. This order varies the previous exemption provided by ASIC Class Order [CO 09/774] by extending the index to the S&P/ASX 300 from the S&P/ASX 200. The purpose of this amendment is to address liquidity and market stability considerations, allowing market makers to engage in naked short selling of securities that are constituents of the S&P/ASX 300 index, thereby providing them with a broader scope of activities while maintaining market integrity. The geographic reach of this class order is national, as it pertains to the Australian financial markets. There are no specific exclusions or thresholds mentioned within the text, although it implicitly excludes entities other than market makers and securities not listed in the S&P/ASX 300 index. The application of this class order may be further defined or extended through subordinate instruments issued by ASIC.
Key Provisions
The main operative sections of ASIC Class Order [CO 11/269] under the Corporations Act 2001 include Section 1020B, which regulates the short selling of certain financial products, and Section 1020F, which allows ASIC to exempt a person from specified provisions of Part 7.9 of the Act. Section 1020B(2) mandates that a person must not sell these products unless they have a presently exercisable and unconditional right to transfer them to the buyer. This Class Order specifically varies the existing CO 09/774 by allowing market makers to engage in naked short selling of constituents of the S&P/ASX 300, rather than the S&P/ASX 200.
The obligations imposed by the Act on the parties it governs include ensuring that any short selling activities are conducted in accordance with the specified provisions. Market makers must still ensure that they have a presently exercisable and unconditional right to vest the products in the buyer, except when the shorted products are constituents of the S&P/ASX 300, in which case they can be exempt from this requirement under the terms of CO 11/269. The Class Order also imposes a responsibility on market makers to maintain sufficient liquidity and to operate within a stable market environment to mitigate settlement risk.
Failure to comply with the provisions of the Corporations Act 2001 and the subsequent Class Orders can lead to significant legal consequences. For instance, unauthorised short selling can result in penalties as prescribed under the Act. While specific penalties are not detailed in the Explanatory Statement, breaches of the Act can generally lead to civil or criminal penalties, including fines and imprisonment, depending on the severity and intent of the breach. The maximum penalties would be determined by the courts based on the specific circumstances of the case and the provisions of the Act.