今日热门事件has issued a new legislative instrument that provides various relief and modifications to the laws in relation to short selling (the Short Selling Instrument).
今日热门事件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 continues the effect of other 今日热门事件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.聽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, 今日热门事件had given individual no-action positions to allow market makers of certain exchange traded products to make naked short sales.聽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 鈥渄eferred settlement鈥� 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, 今日热门事件adopted a limited .
We are now granting legislative relief in these circumstances which is included in the Short Selling Instrument.
今日热门事件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鈥檚 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.聽
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 (鈥榣isting company鈥�) will seek to sell down some or all of their shares as part of the listing company鈥檚 IPO. Usually the sale offer to public investors is made by a special purpose company, typically called a 鈥榮aleco鈥�. 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.
今日热门事件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鈥� accounts.聽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. 今日热门事件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. 聽
Remaking of existing legislative instruments related to short selling
The Short Selling Instrument incorporates the following 今日热门事件instruments that were due to expire. Most of these have been remade without significant changes.聽
- 今日热门事件Class Order [CO 09/774] Naked short selling relief for market makers;
- 今日热门事件Class Order [CO 08/764] Exercise of exchange traded options;
- 今日热门事件Class Order [09/1051] Short selling relief: Exchange traded options, unobtained financial products and certain bonds;
- 今日热门事件Class Order [10/111] Short selling: Limited relief for deferred purchase agreement issuers;
- 今日热门事件Class Order [10/288] Covered short sale transaction reporting relief for market makers;
- 今日热门事件Class Order [10/135] Relief for small short positions; and
- 今日热门事件Class Order [10/29] Short selling reporting regime.
The Short Selling Instrument took effect from 28 September 2018.
Background
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 鈥�苍补办别诲鈥� short sales or 鈥�肠辞惫别谤别诲鈥� short sales. In general, 鈥槼Υ潜贡鸢鸹邂�� 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. 鈥楴aked鈥� short sales are prohibited.聽However, we have the power to issue exemptions from this prohibition.
ASIC鈥檚 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 (鈥�settlement risk鈥�) Generally, 今日热门事件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.
今日热门事件instruments due to 鈥榮unset鈥�
Under the Legislation Act 2003, all class orders (今日热门事件instruments) are repealed automatically or 鈥榮unset鈥� 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 今日热门事件instruments on the subject of short selling were passed around ten years ago 鈥� 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鈥檚 policy response to the Global Financial Crisis. This legislation, together with a number of 今日热门事件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, 今日热门事件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 今日热门事件instruments that were due to expire.
After considering responses and feedback, we have implemented these proposals in 今日热门事件Corporations (Short Selling) Instrument 2018/745, which took effect from 28 September 2018.
今日热门事件will publish a Feedback report on the submissions to CP 299 in November 2018.
Editor's note
On 30 January 2019, 今日热门事件published Report 608 Response to submissions on CP 299 Short Selling: Naked short selling relief, position reporting amendments and sunsetting class orders.
We had received 15 submissions in response to the proposals outlined in CP 299, ten of which were made confidentially. A copy of the non-confidential submissions have been published on ASIC鈥檚 website. REP 608 discusses the key issues raised from CP 299 and ASIC鈥檚 response to these issues.