Legislation imposing permanent restrictions on short selling needs to pass parliament before it rises for the long Christmas break next month, Corporate Governance Minister Nick Sherry says.
Legislation imposing permanent restrictions on short selling needs to pass parliament before it rises for the long Christmas break next month, Corporate Governance Minister Nick Sherry says.
Draft laws, introduced to parliament today, ban so-called naked short selling and provide greater scrutiny of covered short selling.
"In the current global financial crisis, there has been a need to take decisive action, particularly where we see some trading practices that involve manipulation or abuses," Senator Sherry told reporters in Canberra.
"What we've seen over the last 10 months is a very extensive debate about short selling, not just in Australia but around the world."
Put simply, short selling is where an investor sell shares that they don't own, on the assumption that they will fall in value.
A covered short sale is where a person borrows an amount of stock using a legal stock lending agreement, or has some supporting financial security arrangement to support the covered short sale.
"Naked short selling is the same, but in this case the short seller doesn't own, doesn't even have a borrowing arrangement and doesn't even have a pathway in order to obtain the shares they are actually selling," Senator Sherry said.
A temporary ban by the Australian Securities and Investments Commission (ASIC) on covered short selling of non-financial stocks comes to an end next Wednesday and on January 27 for financial stocks.
"It is important that we have certainty going forward when this ban is lifted, if that's the decision that ASIC takes next week," Senator Sherry said.
The government wants the bill to pass through parliament during a fortnight of sittings that begin on November 24, the last before the Christmas break.
The bill also provides greater powers to ASIC to monitor covered short selling.
Brokers will have an obligation to enquire of a client whether a sale is a covered short sale.
There will be an obligation on market operators to publicly disclose short-selling information they obtain from brokers.
ASIC will have power to impose regulations on transactions that are substantially similar to short selling.
Senator Sherry also announced plans to increase the supervision of credit rating agencies and research houses in Australia, one of the first countries to take such action.
"The new supervisory regime being implemented in Australia will be taken to the G20 and will be taken to various international forums and we'll be using it to take a global leadership position in respect to the supervision of these entities," he said.
Leaders of the G20, which comprise the 20 major advanced and emerging economies, are meeting in Washington DC this weekend to discuss measures to counter the global financial crisis.
Prime Minister Kevin Rudd has left Australia to attend the conference.
Under the proposal, credit rating agencies and research houses will no longer be exempt from holding an Australian Financial Services Licence.
"There is no doubt that this is an issue in the US, and with these new supervisory arrangements in Australia, a rating agency or a research house ... will need to report to the regulator as part of that licensing requirement," Senator Sherry said.
Credit rating agencies were initially founded for consumer groups in the United States, but over time they had evolved into business paying for a rating, he said.
"So there is a fairly obviously a conflict of interest.
"If a business is paying for a rating, what is the robustness of that underlying rating."
This follows on members of the hedge fund industry saying this moring that it supports federal government plans to ban naked short selling and impose a disclosure regime for covered short selling.
The Australian arm of the Alternative Investment Management Association (AIMA) said the group had been in talks with regulators and the federal government about legislation to go to parliament today.
But while it supported the naked short selling ban, moves to create greater transparency of covered short selling activity on the Australian stock exchange did not go far enough.
"Disclosure in most countries operates very well where managers/investors report to the regulator, which then discloses aggregated short selling positions to the market," AIMA Australia chairman Kim Ivey said.
"Short selling position data should be reported directly to the ASX from the investor/manager or the investors agent (prime broker or custodian), not via brokers , and reported by the exchange as a percentage of the listed stocks outstanding shares.
"This is how it is done globally and constitutes what is called a stocks short interest.
"Just reporting daily short selling trade data to brokers is seriously insufficient," Mr Ivey said.
He said interim measures designed to only capture daily trade data will give no transparency into the size of the short interest in a listed company, or the rate of change in the short interest.
"Reporting small daily trade data will significantly distort the actual shorting activity in a company's stock as it fails to disclose position size and its implied impact on the stocks price behaviour," he said.
AIMA Australia believes that the reporting regime should disclose "correct data that is valued by stakeholders and demonstrate that Australia is serious about returning to being a sophisticated and trusted market for investment."
The ban, which was imposed on September 19, had been a huge burden for the investment industry, Mr Ivey said.
"If the ban is lifted on non-financial stocks next week, investors will see better price discovery, deeper markets, closer bid/ask spreads, and over time, less volatility," he said in a statement.
