EXPLANATORY STATEMENT
Select Legislative Instrument 2009 No. 12
Issued by authority of the Minister for Superannuation and Corporate Law
Corporations Act 2001
Corporations Amendment Regulations 2009 (No. 1)
Subsection 1364(1) of the Corporations Act 2001 (the Act) provides that the Governor-General may make regulations prescribing matters required or permitted by the Act to be prescribed by regulations, or necessary or convenient to be prescribed by such regulations for carrying out or giving effect to the Act.
The amendments repeal regulations 7.9.79 and 7.9.80A of the Corporations Regulations 2001 (the Principal Regulations), in support of Schedule 2 of the Corporations Amendment (Short Selling) Act 2008 (the Amendment Act). Schedule 2 of the Amendment Act contains amendments to prohibit certain short sale transactions, which are generally naked short sales.
Naked short selling occurs when a seller of a security does not own and has not borrowed or arranged to borrow securities at the time of sale but intends to purchase or borrow securities in order to meet delivery obligations.
Subsection 1020B(2) of the Act currently provides that a person can only sell certain financial products if the person has, or believes on reasonable grounds that they have, a presently exercisable and unconditional right to vest the products in the buyer. This subsection operates to generally prohibit naked short selling but is subject to certain exemptions in the Act and Principal Regulations. This means that, to make a naked short sale, a person must rely on an exemption in the Act or Principal Regulations.
The Explanatory Memorandum to the Amendment Act notes that various concerns have been expressed in relation to naked short selling. Transactions of this nature may have a higher risk of settlement failure (because the seller does not have a presently exercisable and unconditional right to vest the products at the time of sale). They may also distort the operation of financial markets by causing increased price volatility and potentially facilitating market manipulation. In addition, the perceived activity of naked short sellers is likely to damage market confidence particularly among retail investors. For these reasons, naked short selling has the potential to damage the integrity of Australian financial markets. In light of this, and given the limited evidence of any significant market-wide benefits from naked short sale transactions, it was considered appropriate to remove the general ability for people to enter into these transactions under the Corporations Act.
The Amendment Act repealed the exemptions that generally facilitated naked short selling. Consistent with the Amendment Act, the amendments repeal regulations 7.9.79 and 7.9.80A which provide further exemptions to the subsection 1020B(2) prohibition.
Subregulation 7.9.79(1) means the prohibition does not apply to the sale of a financial product which consists of the giving or writing of an option registered with the Options Clearing House Proprietary Ltd or SFE Clearing Corporation Pty Ltd. Subregulation 7.9.79(2) provides the prohibition does not apply to short sales of shares if the short seller holds exchange traded options at the time of sale, which, if exercised, would result in the short seller holding at least the number of shares sold short. Regulation 7.9.80A provides that the prohibition does not apply to the sale of certain bonds or debentures by persons as principals, in certain circumstances, and where the seller believes on reasonable grounds that arrangements can be put in place in time for settlement.
The Australian Securities and Investments Commission (ASIC) has the power under section 1020F of the Act to issue exemptions for subsection 1020B(2) of the Act that would allow naked short sales in certain circumstances. ASIC Class Order 09/01051, which was issued on 5 January 2009, continues the operation of the exemptions that were contained in regulations 7.9.79 and 7.9.80A. Given the dynamics of the market and the rapid changes in the conduct and structure of financial markets, the Government considers that these exemptions are more appropriately facilitated by ASIC, rather than by law.
Under the Corporations Agreement 2002, the Commonwealth must consult with the Ministerial Council for Corporations before making amendments to certain provisions of the Principal Regulations. The Council were consulted about these amendments, and were notified of the Minister’s decision to dispense with the period of public exposure given the Regulations are incidental to Schedule 2 of the Amendment Act.
While parts of the Act were exposed for public comment prior to its introduction into Parliament, Schedule 2 was an addition to the Act after public consultation. However, a number of stakeholders, including the Australian Securities Exchange, have indicated support for banning naked short selling. In addition, the Senate Economics Committee has held a public inquiry into the Act (including Schedule 2) and recommended that the legislation be passed without delay. There has been targeted consultation with ASIC as part of developing all the measures contained in the Act and ASIC supports all the measures in the Act. Stakeholders have indicated that there is a limited amount of naked short selling. Therefore the ban should not cause significant disruption to the market. ASIC can also use its exemption power to allow some naked short selling to ensure the ordinary operation of Australia’s financial markets.
The Regulations are a legislative instrument for the purposes of the Legislative Instruments Act 2003. The Regulations commence on the day after they are registered on the Federal Register of Legislative Instruments.