ASIC has issued a new legislative instrument that provides various relief and modifications to the laws in relation to short selling (the Short Selling Instrument).
ASIC has also updated its existing guidance in Regulatory Guide 196 Short selling to reflect the legislative instrument.
In addition to providing new relief and modifications, the Short Selling Instrument (ASIC Corporations (Short Selling) Instrument 2018/745) continues the effect of other ASIC instruments that were due to expire. It follows a public consultation under CP 299 Short selling: Naked short selling relief, position reporting amendments and sunsetting class orders, earlier this year.
The new relief and modifications are summarised below and cover:
- legislative relief for ETF market makers;
- deferred settlement trading;
- initial public offering (IPO) sell downs; and
- an option for global firms to calculate their short positions as at a global end calendar time.
Legislative relief for ETF market makers
The Short Selling Instrument provides legislative relief to allow ETF market makers to make naked short sales in exchange traded funds (ETFs) and managed funds in the course of making a market in units in those funds.
This legislative relief facilitates market making which provides benefits of liquidity to the market. The settlement risk is low because the market makers have the ability to apply to the fund issuers for the creation of new fund units in time for the settlement of any short sales.
Since 2008, ASIC had given individual no-action positions to allow market makers of certain exchange traded products to make naked short sales. We now consider that it is an appropriate time to provide this as legislative relief.
To rely on the relief, ETF market makers will need to meet additional conditions not previously included in our no-action letters (see RG 196.46).
Deferred settlement trading
Various corporate actions can result in the issue of products, including securities, to specified persons, such as existing shareholders. These products may commence trading on a licensed market before they are issued, on a “deferred settlement” basis. Deferred settlement arrangements are established market practice and have operated without undue settlement risk. However, the sale of unissued products during these periods is arguably in breach of the naked short selling prohibition.
In December 2017, ASIC adopted a limited no-action position for trading in unissued section 1020B products during a deferred settlement period.
We are now granting legislative relief in these circumstances which is included in the Short Selling Instrument.
ASIC is also granting relief in the Short Selling Instrument for conditional and deferred settlement trading that follows an initial public offering (IPO) or other public offer. Our relief permits trading where the seller’s entitlement to the products is conditional on standard conditions that the Australian Securities Exchange (ASX) generally imposes under its operating rules. If these conditions are not fulfilled, under the operating rules all trades that occurred during the period are cancelled.
In the CHESS Replacement Consultation Paper (April 2018), the ASX indicated, as part of the Corporate Actions STP Phase 2 Project, that they will review deferred settlement trading processes to assess whether there are any opportunities for simplification and more streamlined timetables. In light of potential changes to the deferred settlement period arising from this project, this aspect of the relief will cease at the end of 30 September 2021.
IPO sell downs
The Short Selling Instrument will permit naked short selling in the context of IPO sell downs where a special purpose company or saleco offers shares to IPO investors before it has an unconditional right to those shares.
Often existing shareholders of a company seeking to list on ASX (‘listing company’) will seek to sell down some or all of their shares as part of the listing company’s IPO. Usually the sale offer to public investors is made by a special purpose company, typically called a ‘saleco’. If the saleco is not selling on behalf of the existing shareholders, the sale offer will contravene s1020B(2) because its entitlement to the shares is itself conditional on ASX listing.
ASIC has previously granted individual relief for IPO sell downs and we consider legislative relief to be appropriate because they do not involve the type of settlement or market integrity risk that s1020B is intended to prevent.
Providing an option for global firms to nominate the global end calendar time for calculating their short positions
Short positions are currently calculated as at 7pm Sydney time.
The Short Selling Instrument will now provide an option for firms to nominate to calculate their short positions as at the global end calendar time.
A global end calendar time is the end of the trading day in the location in which the relevant transaction is booked in the short sellers’ accounts. This option is of particular relevance to global firms.
For global firms with trading desks that operate in a number of different time zones, the proposal will reduce compliance burden (by removing manual work arounds) and the risk of human error, without significantly affecting transparency to the market. ASIC will continue to publish reports of short selling positions at T+4. We do not expect the proposal to affect domestic firms as they continue to rely on the 7pm Sydney time.
Remaking of existing legislative instruments related to short selling
The Short Selling Instrument incorporates the following ASIC instruments that were due to expire. Most of these have been remade without significant changes.
- ASIC Class Order [CO 09/774] Naked short selling relief for market makers;
- ASIC Class Order [CO 08/764] Exercise of exchange traded options;
- ASIC Class Order [09/1051] Short selling relief: Exchange traded options, unobtained financial products and certain bonds;
- ASIC Class Order [10/111] Short selling: Limited relief for deferred purchase agreement issuers;
- ASIC Class Order [10/288] Covered short sale transaction reporting relief for market makers;
- ASIC Class Order [10/135] Relief for small short positions; and
- ASIC Class Order [10/29] Short selling reporting regime.
The Short Selling Instrument took effect from 28 September 2018.
Short selling in Australia
A short sale occurs when a person sells a financial product that they do not currently own in the expectation that they can purchase the financial product later at a lower price.
Short selling is regulated by the Corporations Act and the Corporations Regulations. Short sales may be either ‘naked’ short sales or ‘covered’ short sales. In general, ‘covered’ short sales are short sales made in reliance on an existing securities lending arrangement. Covered short sales are permitted in Australia but subject to certain reporting and disclosure obligations. ‘Naked’ short sales are prohibited. However, we have the power to issue exemptions from this prohibition.
ASIC’s policy on short selling is set out in Regulatory Guide 196: Short Selling. Naked short sales are prohibited primarily due to the potential for disruptions to the market caused by the failure to deliver the products by the due date for delivery (“settlement risk”) Generally, ASIC will provide exemptions from the prohibition against naked short selling in circumstances where settlement risk is low and particularly in circumstances where the exemption may facilitate activities which benefit the market.
ASIC instruments due to ‘sunset’
Under the Legislation Act 2003, all class orders (ASIC instruments) are repealed automatically or ‘sunset’ after a period of time (mostly 10 years) unless we take action to preserve them. This ensures that legislative instruments like class orders are kept up to date and only remain in force while they are fit for purpose and relevant.
Many ASIC instruments on the subject of short selling were passed around ten years ago – that is in or around 2008. That was the year in which the Government passed the Corporations Amendment (Short Selling) Act 2008 and other amending regulations. This formed part of Australia’s policy response to the Global Financial Crisis. This legislation, together with a number of ASIC instruments issued around that time, provides the framework for the regulation of short selling in Australia.
Since the oldest of these instruments are now ten years old, and accordingly due to expire under the sunsetting regime, ASIC took the opportunity to review our policy settings on short selling on a wholistic basis.
In CP 299, we consulted on a number of proposals in relation to short selling including our intention to continue existing ASIC instruments that were due to expire.
After considering responses and feedback, we have implemented these proposals in ASIC Corporations (Short Selling) Instrument 2018/745, which took effect from 28 September 2018.
ASIC will publish a Feedback report on the submissions to CP 299 in November 2018.
© Australian Securities & Investments Commission. Reproduced with permission.