Asic Extends Ban On Short Selling

Sydney Morning Herald

Wednesday October 22, 2008

Colin Kruger

THE Australian Securities and Investments Commissions (ASIC) has extended its ban on short selling, citing "still fragile" markets, despite industry criticism of the unprecedented action and questions over whether the ban has been effective.

ASIC chairman Tony D'Aloisio said that while action taken by the Federal Government and its international counterparts was "positive", it had yet to work its way through the financial system.

"The financial markets are still fragile, so we feel the reopening of covered short sales should be done in stages and in a measured way over an extended period and have regard to systemic issues, particularly for financial stocks," he said.

ASIC said the ban on covered short selling had been extended for a further 28 days until November 18 "when it is expected the ban will be lifted".

The ban on covered shorting of financial stocks has been extended to January 27 next year. ASIC said that while the United States had lifted its bans on short selling, Britain had retained its ban on the shorting of financial stocks.

"Covered" short sellers borrow a stock, then sell it in the hope of driving the share price down so they can buy it back at a lower price - at a profit - before returning the borrowed stock to its original owner.

"'Naked" short selling is more risky, as the seller does not borrow the stock before selling it. Thus they must subsequently acquire stock which has already been on-sold to another party.

The ban on "naked" short selling will remain in place until the Government introduces new legislation next year governing the practice, and disclosure, of short selling. The draft legislation was open for public comment until yesterday.

Despite the introduction of the bans last month, the sharemarket plummeted to new depths.

The Australian arm of the hedge fund industry body, the Alternative Investment Management Association (AIMA), condemned the extension.

"The original aim of the ban was to reduce volatility in the markets and this has clearly failed. We question ASIC's rationale for keeping the ban," said the chairman of AIMA, Kim Ivey.

He noted that the market fragility related more to overseas markets, where bank bail-outs had been necessary, and said the ban in Australia had actually created more volatility due to "a vacuum of buying".

ASIC said it expected to announce new disclosure guidelines and reporting arrangements for short selling next week.

© 2008 Sydney Morning Herald

Back to News Index | Back to Home