Bill Shorten (Maribyrnong, Australian Labor Party, Parliamentary Secretary for Disabilities and Children's Services) Share this | Hansard source

The Rudd government has injected $10.4 billion as part of the Economic Security Strategy to stimulate economic activity and protect vulnerable groups in our society, especially pensioners, carers, people with disabilities and low-income families. This strategy builds on the decision already taken by the government to guarantee the bank deposits of all Australians. It shows true leadership by the Rudd government.

As defined by the ABS, covered short selling refers to the practice of short selling securities one does not have—to settle the trade, securities need to be purchased or borrowed. There is a general concern that short selling drives down equity values. A variety of independent studies have been published on this and the consistent conclusion is that short sellers tend to be contrarian in nature. Generally studies have demonstrated that as equity prices fall short-selling activity increases. Regulators globally continue to regard short selling as a legitimate investment technique that contributes to price efficiency and liquidity.

Short selling can protect investors from purchasing overpriced assets. However, it is fair to say that short selling has become synonymous with hedge funds and the loss of money by financial interests. Some of this criticism is exaggerated. Short selling is part of the system. Short selling can enhance market competition by allowing the pricing process to fully benefit from the insights of investors, with negative as well as positive opinions. Short selling is often used to support the following strategies: arbitrage trading, such as yield enhancement, dividend reinvestment plans, convertibles, pair trading and relative value; directional play; active extension strategies, such as 130/30 long-short mandates; merger and acquisition activity; support for derivative products, such as futures and options; and index rebalancing.

The Corporations Amendment (Short Selling) Bill 2008 contains three key measures: (1) it clarifies the ability of ASIC to regulate short selling and puts beyond doubt the validity of ASIC’s recent class orders in relation to short selling; (2) it bans naked short selling—ASIC has the power to grant exemptions from this ban; and (3) it establishes a disclosure regime for covered short-sale transactions—that is, short sales supported by securities lending arrangements.

This bill is urgent as a means of enhancing market confidence during a period of significant international market volatility. The amendments will provide certainty to the market regarding the scope of ASIC’s powers to regulate short selling. That makes the opposition’s reckless but failed attempt yesterday in the Senate to delay the passage of critical legislation a disgraceful event. The opposition’s political play on this bill was revealed yesterday when they asked a series of questions during a hearing of the Senate Standing Committee on Economics under the pretence of genuinely seeking to form a view on the bill. But an overzealous opposition senator got ahead of himself and hours before the evidence was even complete lodged a notice of motion to delay the bill—ah, the benefits of telepathy!

As the Minister for Superannuation and Corporate Law said yesterday:

At a time when the global financial crisis is hitting real people hard, such as through their superannuation accounts, this measure will deliver the certainty that is required …

The Corporations Act grants ASIC the general power to omit, modify or vary certain parts of the Corporations Act through declarations. These amendments will specify how this general power applies to short selling. The amendments make it clear that ASIC has the power to regulate all aspects of short selling, including prohibiting these transactions and imposing or varying requirements on these transactions. These powers will extend to transactions with the same or a substantially similar market effect as short selling.

The amendments also expressly state that the short-selling declarations made by ASIC earlier this year were within the scope of ASIC’s general power. These declarations had the effect of prohibiting covered short sales on Australian financial markets subject to some exemptions. They also introduced a disclosure regime for covered short sale transactions taking place under exemptions to the prohibition. ASIC’s actions were necessary in light of the high levels of volatility being experienced in Australian and global financial markets, and international regulatory developments occurring at the time. These amendments are for the avoidance of doubt. They provide both ASIC and industry with certainty over the scope of ASIC’s powers in relation to short selling. This is necessary to ensure the effective regulation of short selling in Australia.

The bill also amends the Corporations Act to prohibit naked short sale transactions. A naked short sale is a transaction where the seller does not have a presently exercisable and unconditional right to vest the product in the seller at the time of sale. Various concerns have been expressed in relation to naked short selling. Transactions of this nature may have a higher risk of settlement failure because the seller does not have the capacity to vest the products at the time of sale. They may also distort the operation of financial markets by causing increased price volatility and potentially facilitating market manipulation. In addition, the perceived activity of naked short sellers may damage market confidence, particularly among retail investors.

For these reasons, it was considered appropriate to remove the general ability for people to enter into naked short sales under the Corporations Act. However, ASIC has the power to allow naked short sale transactions if it considers them appropriate. It is envisaged that ASIC will use this power to allow some non-speculative naked short selling. This is necessary to ensure the continued ordinary operation of Australian financial markets. It is appropriate that ASIC manage these exemptions, given the dynamics of the market and the rapid changes in the conduct and structure of financial markets.

Finally, the bill establishes a disclosure regime for covered short sales. Covered short sales are sales supported by securities obtained under a legally binding securities lending agreement. Under the proposed disclosure regime, a seller will be required to disclose covered short sales to their broker. The broker will in turn be required to disclose this information to the market operator. Brokers trading on their own behalf will be required to disclose covered short sales directly to the market operator. The market operator will be obligated to publicly release details relating to this information. It will be an offence for a seller or broker to not disclose details of a covered short sale. Regulations will set out the timing and manner of the disclosures. Market practice had developed whereby most covered short sale transactions were not reported. This has created significant uncertainty relating to the activity of covered short sellers in Australian securities, which is damaging investor confidence in financial markets. These problems are obviously amplified by the current market volatility.

The legislation aims to provide certainty to markets beyond the expiry of parts of a temporary ban on all short selling imposed in September. The Australian Securities and Investments Commission imposed the ban after similar crackdowns in the United States and some European markets, as regulators acted to defend troubled financial services sectors. I agree with the words of the Minister for Superannuation and Corporate Law, who has said:

… in the current global financial crisis, there has been a need to take decisive action, particularly where we’ve seen some trading practices that involve manipulation or abuses.

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