Insights / November 7th, 2018

ASIC guidance and relief on short selling


‘Short selling’ is the selling of a financial product not owned by the seller, who has a view to repurchase the financial product later at a lower price. Short selling is regulated by the Corporations Act 2001 (Cth) (”Corporations Act”) and short sales can be either naked or covered short sales.

Generally, covered short sales are the execution of a short sale, where the seller relies on an existing securities lending arrangement to have a presently exercisable and unconditional right to vest the products in the buyer at the time of sale. Covered short sales are permitted under the Corporations Act.

Naked short sales are the execution of a short sale of securities, where the seller does not rely on a securities lending arrangement. Under the Corporations Act a person must not sell securities, managed investment products, foreign passport fund products, and others) in Australia if, at the time of sale, the person does not have a presently exercisable and unconditional right to vest the product in the buyer, except where ASIC has provided relief.

A person making a short sale on a licensed market must comply with the reporting and disclosure requirements, as failing to report is an offence under the Corporations Act. ASIC RG 196 provides guidance on short selling and has been issued 8 October 2018 to reflect the changes introduced by the Instrument.

New relief and modifications

The new relief and modifications introduced by the Instrument include:

  1. legislative relief for exchange traded funds (“ETF”) market makers;

  2. legislative relief in certain circumstances for deferred settlement trading;

  3. the permitting of naked short selling in the context of initial public offering (“IPO”) sell downs; and

  4. an option for global firms to calculate their short positions as at a global end calendar time.

Previously, ASIC had given no-action positions to each market maker of certain exchange traded products to make naked short sales. However, the Instrument now provides relief to allow ETF market makers to make naked short sales in ETFs and managed funds in the course of making a market in units in those funds. The relief under the Instrument is only available if the ETF market makers meet the additional conditions set out in the Instrument.

The Instrument grants legislative relief for trading in unissued section 1020B products during a deferred settlement period in certain circumstances, where previously ASIC had adopted a limited no action position at the end of 2017.

Naked short selling is permitted by the Instrument 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. Under the Instrument, firms will now have the option to nominate to calculate their short positions as at the global end calendar time, which is particularly relevant to global firms.

Our financial services team has extensive experience in advising clients to comply with their obligations under the Corporations Act. If you have any questions, please contact Richard Beissel or Hillary Ray.

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