Jon Sullivan (Longman, Australian Labor Party) Share this | Link to this | Hansard source

I am pleased to rise today to support the Corporations Amendment (Short Selling) Bill 2008. This bill has very simple objectives—that is, to enhance market confidence in a time of significant market volatility. I think that we are all aware of what is going on around the world today, despite the fact that just a short while ago members opposite believed either that it had been caused by the election in Australia in November 2007 or that it was in fact a furphy. This bill does three things, which have been canvassed reasonably widely, but I wish to visit them again. Firstly, it bans naked short selling. Secondly, it requires full disclosure in relation to covered short selling. Thirdly, it clarifies ASIC’s powers under the Corporations Act 2001. The member for North Sydney was a bit concerned whether we knew what short selling was when he came into the House before question time today, so I thought that I would tell him briefly that I do understand what short selling is. Short selling is the practice of selling shares that the seller does not own, then buying the shares back to complete the original transaction. Covered short selling is selling of borrowed shares—the sense of which escapes me somewhat. Naked short selling is selling shares that do not exist.

In 2005, Patrick Byrne raised the alarm in the US about naked short selling. He was ridiculed for his views and pilloried widely within the financial community. I note also that Warren Buffett was widely reported, but also disregarded, when he raised concerns in the early part of this century about derivatives, arguing that such highly complex financial instruments were time bombs and ‘financial weapons of mass destruction’ that could harm not only their buyers and sellers but the whole economic system. History has shown who was right in that case and also in the warnings that Patrick Byrne was making in 2005. Naked short selling has been blamed by some as a contributor to the global financial crisis, just as many hold that short selling tactics are a major cause of all market downturns—for example, the 1987 crash. Others will be much better placed than me to make judgements regarding the degree to which those views hold true.

Schedule 2 of the bill effectively bans the practice of naked short selling in Australia. Naked short sales have a high risk of failure—that is, when settlement is due, the seller does not have the shares to transfer. ASIC can, if it sees fit, allow some naked short selling. It is assumed that this power will be used only when such sales are necessary to ensure the ordinary operation of financial markets. There is plenty of support for the practice of short selling. The website Investopedia, for example, expresses this view:

… short selling makes an important contribution to the market. It provides liquidity, drives down overpriced securities, and generally increases the efficiency of the markets. Short sellers are often the first line of defense against financial fraud.

It goes on to say:

… work from short sellers is often regarded as being some of the most detailed and highest quality research in the market. Its been said that short sellers actually prevent crashes because they provide a voice of reason during raging bull markets.

That is high praise indeed. The Reserve Bank in Australia considers that both short selling and the associated securities lending add to market liquidity and pricing efficiency.

The Parliamentary Joint Committee on Corporations and Financial Services in its June 2008 report Better shareholders, better company: shareholder engagement and participation in Australia remarked upon the existence of a ‘widespread view that short selling activities are not subject to sufficiently rigorous disclosure requirements to ensure shareholders remain adequately informed’. All members of parliament and all members of society—except those with an ulterior motive—would want to see that people participating in our markets are adequately informed. Consultation during the drafting of this bill saw the government receive submissions from a wide range of stakeholders. Investors, brokers, ASIC and the ASX all made submissions. That wide range of stakeholders broadly supported disclosure of covered short sales, but offered different views as to how this could be best achieved.

Short selling, it seems, is here to stay, though, as I said before, I personally struggle with the concept of selling shares you do not own to people who are buying them with money they do not have. We saw a large number of such investors suffer quite savagely when margin calls were made earlier this year as the stock market headed south.

In reading some material for this debate I came across an unattributed quotation. I cannot tell you who uttered this wisdom, but it is wise. It was: ‘You can never control the market; you can only help it reach the best conclusion by providing as much information as possible.’ The provisions in this bill that go to providing that information are found in schedule 3. It is that schedule that the opposition indicated earlier today that they will be opposing. The shadow minister for financial services, superannuation and corporate law, the member for Aston, made that clear during his contribution.

To be fair, he did also say that he offered the government the opportunity to redraft these provisions through his amendment. The question is, of course, what is it about the disclosure of covered short sales that has the opposition so spooked that they would try, as they did in the other place, to delay the passage of this bill; so spooked that, when my colleague, the member for Leichhardt, sought to canvass the matter, he was continually interrupted by fallacious points of order taken by the member for Calare?

These are good provisions. Transparency in the market is particularly important at this time, and the sooner this bill passes through this place the sooner Treasury can consult the industry about the details of the regulations. Delaying, or watering down, these provisions is not in the interests of this nation at this time. It may be in the interest of sections of the community with whom members opposite curry favour; I simply do not know. But I do know that the approach taken by the opposition does them no credit in the context of Australia’s response to every nuance of the global financial crisis.

Schedule 1 of the bill contains the provisions dealing with ASIC’s powers. These go firstly to clarifying ASIC’s powers to regulate short selling. ASIC’s powers as set out in the Corporations Act 2001 are more than likely adequate to allow ASIC to undertake this action. However, these changes make it clear—crystal clear—that the power does exist. Similarly, this bill validates the actions that ASIC has taken so far in relation to short selling. Again, this makes it clear that the power exercised was a power anticipated by the provisions of the Corporations Act 2001. Taken together, these are sensible measures. The absence from the 2001 legislation of explicit power does not mean that the power does not exist. The rules applied in statutory interpretation would more likely than not confirm that. However, these are times when certainty on regulatory matters is vital and therefore it is prudent to include quite explicit provisions in the principal act.

I want to spend a moment in considering those actions taken by ASIC in relation to short selling in the market. On 21 September, ASIC put a 30-day ban on the covered short selling of securities, a ban that they extended on 21 October as a consequence of the market conditions that existed at that time. On 13 November, they announced that that ban would be lifted except in relation to the 46 securities that make up the S&P and ASX 200 financials index, plus five other securities. At the same time, they indicated that the ban on covered short sales of those 51 securities would remain in place until 27 January 2009. The ban on naked short selling, as indicated by ASIC, is to remain in place indefinitely.

The announcement of 13 November also included a reporting and disclosure procedure, which market participants are following. Interestingly, the daily gross short sales report for 24 November shows that 27 of the financial securities on the S&P ASX 200 financials plus five list were short traded on that day. Clearly, that shows that ASIC is working with market participants to ensure what we require: the orderly operation of the market.

Australia’s strong position in the context of the global financial crisis is due in no small part to the financial regulators. As one of those regulators, ASIC is delivering for the market and the people of Australia the certainty that is required at this time of volatility. This is a very good bill. The measures in this bill are important. They make improvements to the market architecture. They are deserving of the support of all members in this House. They have my support. I commend them to the House.

Janelle Saffin (Page, Australian Labor Party) Share this | Link to this | Hansard source

The Corporations Amendment (Short Selling) Bill 2008 is necessary for a number of reasons. Short selling has a higher risk of settlement failure and these types of transactions have the power to distort—and do distort—the operation of the market by increasing volatility. They also facilitate market manipulation, a scenario that has arisen given that we now have a global financial crisis. It is one that we have to mitigate. This bill does just that.

It is not as if it is a new situation, though, as this bill is filling a gap in the Corporations Law identified in and present since 2001—seven years ago. But it has taken Labor to come to government and the Rudd Labor government to take the action to fill that gap. It was necessary in 2001, 2002, 2003, 2004, 2005, 2006 and 2007, but it is even more necessary and pressing now. I do not know why the previous government failed to take action in this area, particularly when it was a government that liked to tell us that it understood the market, financial issues, the economy and the world of finance. I submit that, if it did, a lot more would have been done in this area and in a range of other areas.

I might have strayed a little from the direct purpose of the bill, but it is necessary to identify why the Rudd Labor government is having to take this action and mop up after those years in this way. The reason for our move to prohibit short selling is self-evident, but it will do the following. It will enhance the integrity of Australia’s markets and complement action already taken to strengthen our financial system through the national regulation of credit and financial services and forthcoming action on credit rating and research houses. It will dampen the volatility. It will bring some certainty—as much as it can—to a market area that does carry risks. The nature of investment has some risk at its core. You can never legislate risk out entirely, so there has to be a balance between the right type and quantum of regulations and allowing the investors and the market to function. I suggest that this bill is on the mark in that regard. It gets the balance right. The lack of any clear legal framework and system-wide disclosure of covered short selling has created this uncertainty or added to it. It is of a type that is not healthy and it has damaged market confidence, not strengthened it, hence the urgent necessity to get the bill through now.

I have heard in the debate some people speaking along the lines of, ‘The regulations are yet to be filled in, particularly by ASIC.’ If you look at the way the taxation system works, there are a lot of things that get what I would call not ‘filled in’ but ‘filled out’. That is the way it works and that is the way this will work as well. Some things have to be a developmental process. We cannot envisage every situation and scenario that is going to arise that could be characterised as short selling, and it is absolutely necessary to allow the regulator the scope to oversee it.

The bill contains three key measures and I want to say a little about those. The first is the prohibition of naked short selling. The bill removes the general ability of people to enter into naked short sales under the Corporations Act. But ASIC still 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. That is necessary to ensure the ordinary operation of the Australian financial markets. Short selling is in a sense speculative, and that is one of the things that the legislation and the regulatory framework have to try to come to grips with. It is the speculative nature of the short selling that is a problem and causes the distortion and the volatility.

The second of the three key measures is the disclosure of covered short sales. This bill establishes the legal regime for the reporting of covered short sale transactions to the market. The market practice as we currently know it has developed where most short sale transactions are not reported, and that is an unacceptable situation. It means that the system is not transparent, and if we do not have transparency in the market we end up with mayhem in the market over and above the normal argy-bargy and risks that people are willing to take. These problems, though, are amplified by the current global financial crisis, which adds to the volatility in the market. The amendments will assure the reporting of covered short sales, and that enhances the transparency and integrity of our financial markets.

The third key measure is the clarification of ASIC’s powers. In that area, the Corporations Act grants ASIC the general power to omit, modify or vary certain parts of the Corporations Act through declarations. The bill specifies how this general power applies to short selling—and this is how it should be. This is how it has to work when we are dealing with the market and shares. 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. These powers will also extend to transactions with the same or substantially similar market effect as short selling. We can envisage some of those situations, but it would be impossible to describe them. We would end up with a law that could be larger than the tax act. Some of those situations will arise and emerge and some of them we do not even know about today. It is appropriate that that power is with ASIC.

The amendments also expressly state that the short selling declarations made by ASIC early this year were within the scope of ASIC’s general power. My brief reading of it—and there is always a debate about whether the regulator has the power or not—suggests to me that it did have the power, but there were doubts raised. If there are doubts raised, then the view is always taken that those doubts have to be put to bed, and this bill does that precisely.

I shall now turn to some other issues arising out of this bill. There was public consultation on a draft bill and that prompted submissions from a wide range of interested parties, from investors and brokers and the regulators. There was a general consensus that supported the disclosure of covered short sales, but with a wide range of views on how to achieve it. There was not universal support—one can never hope for that as some people just want to be left alone, business as usual. But that is a situation that is not possible, not acceptable, not tolerable. Inaction in this case is harmful. We need corrective action. I know some also subscribe to the view that we can leave the market alone. It is called the Gaea principle—somehow the earth will correct itself and in the same way the market will correct itself. But that does not happen. The market builds up. It is an institution in its own right—admittedly, a very unwieldy institution of sorts—and it does require regulation. It does require law and it requires good public policy, and that is what this bill will provide.

Covered short sales represent a small part of the market, but for something that is small it has an inordinate impact on the market in terms of the distortion that it can create. When people talk about it on a percentage basis and say, ‘It may only be a few per cent,’ the impact is exponential. That is why it cannot be allowed to continue the way it is. Also, it was shrouded in what could only be termed secrecy. It is this secrecy that the bill is designed to address.

I also want to say a little about the provision for ASIC to fill out the regulatory framework. I did a straw poll of members in this House on all sides and asked them to explain what they thought short selling was. It was interesting. Yes, I did ask the Minister for Competition Policy and Consumer Affairs as well—that is why he is turning around and smiling. He knows what it is. The responses I got on what short selling is were interesting. I have seen a lot of the argy-bargy across the chamber with people saying: ‘Go on. You say it. You describe it.’ It is an area that a lot of people have not been involved in. I am just making the point that within the market and within this area it can be complex and it can be confusing to some. However, short selling is pretty straightforward and there is a variety of ways of describing it. In essence, short selling is selling something that you do not own and there are whole lot of other flow-on effects and scenarios that arise out of it. But it is the secrecy issue and a lack of transparency that is a real problem.

I would like to talk here about ASIC having the power to, what I call, fill out—not fill in—the regulatory framework. It is not possible to define in forensic detail all scenarios that can be characterised as short selling or covered, in this case, in the same way that all tax liabilities cannot be so defined in that forensic way in an act. That is why—and I am arguing by analogy but it is very apt in this case—the Commissioner of the Australian Taxation Office has a similar power within law. He has all the checks and balances so that the tax liabilities can be filled out in the same way. That is why it is necessary to have this power. I note that opposition members are saying that they object to that. But it just does not make sense because it is vital to have that provision within the act. With those few words, I would like to commend the bill to the House.

Chris Bowen (Prospect, Australian Labor Party, Assistant Treasurer) Share this | Link to this | Hansard source

I would like to thank all honourable members who contributed to this debate. The Corporations Amendment (Short Selling) Bill 2008 is particularly important, especially in the current environment. It will improve the regulation of short selling while also enhancing the integrity, fairness and transparency of our markets. Importantly, the bill provides certainty about the powers of the Australian Securities and Investments Commission to regulate short selling, including transactions that have a substantially similar market effect as short sales.

The recent international financial turmoil has highlighted the need for this certainty so that ASIC is able to respond quickly to issues that could potentially threaten the fair and orderly operation of our markets. The bill also puts beyond doubt ASIC’s recent use of its power to make various class orders in relation to short selling. The amendment will importantly provide certainty to business. The bill bans naked short selling. This is subject to ASIC’s ability to grant exemptions from this prohibition. The government foresees the ASIC exemptions may allow some non-speculative naked short sales to ensure ordinary operation of the market. There are concerns around increased settlement risk as there are no available securities earmarked for settlement and naked short sales can cause increased price volatility, potentially facilitating market manipulation. There is also limited evidence of any significant market wide benefits from naked short sale transactions.

Finally, the bill provides for the disclosure of covered short sales with regulations made under the bill to set the time and manner of such disclosures. This measure is primarily about transparency which will enhance confidence and market integrity. The uncertainty surrounding the activity of covered short sellers in the Australian securities market is having a significant impact on Australian capital markets. We have seen a significant price decline in some shares which has caused considerable speculation about the role of short selling. This speculation is affecting confidence in the market, particularly among retail investors. The disclosure of covered short sales will provide useful information to investors and regulators, contribute to pricing efficiency and also promote confidence and integrity.

Let us be very clear. These three interrelated measures, all the measures, including schedule 3 and disclosure, are essential and urgent. These are measures supported by ASIC and the Australian Securities Exchange. They add further to the integrity and clarity of our market. It is particularly disappointing that the opposition is being so irresponsible on this matter. It is particularly disappointing that they have chosen to continue their grave irresponsibility in the face of this crisis. They have undertaken a number of steps during this financial difficulty which have left the financial markets in Australia shaking their heads at the irresponsibility of the opposition, and we see another instance of that this evening.

The shadow minister has foreshadowed that he will move to remove schedule 3, which is the schedule relating to disclosure. The opposition seem to think it is fine to let the current temporary arrangements continue. They seem to think it is fine to let the ASIC imposed emergency arrangements continue ad infinitum. What they do not recognise, or they choose to ignore, is that there is no legislative backing for those and therefore there is no penalty regime. So there is a regime in place which is appropriate for an emergency situation, but is not appropriate ongoing. What is appropriate ongoing is that we have a situation where there are penalties for ignoring the law. At the moment the opposition want to continue the situation where there is a set of arrangements in place with no penalties. They ignore the views of ASIC, they ignore the views of the Australian Securities Exchange and they ignore the views of ASFA, the peak body which represents APRA regulated superannuation institutions in this country, and instead search around desperately trying to find an area in which they can differentiate themselves from the government. They try and find an area to score cheap political points, and that says more about them than it says about anything in this bill.

Every day that this legislative gap remains open, every day that this anomaly remains, every day that ASIC’s powers remain unclear or unlimited and every day that we rely only on a potentially non-legal suspension of naked short selling is another day of market uncertainty. This bill stands to protect retail investors and Australian companies. If the opposition had succeeded in delaying the consideration of this bill, as they attempted to do in the other place, presumably authorised by the shadow minister and the Leader of the Opposition, then we would have seen this bill delayed even further, and we see the shadow minister moving in this place to remove a very important schedule, schedule 3. He deserves to be condemned, as I am sure the market will condemn him, for doing so. It is critical that this bill is passed to deliver certainty to the market and allow the Treasury to commence further detailed consultations with industry about the regulations.

The shadow minister says the bill is far too broad and that it allows too much scope for moving within the regulations. What he does not recognise is that it is appropriate for the regulations to be the main mechanism for setting the detailed regulation of this matter. We need to have a situation where the government, on the advice of regulators, can respond flexibly to what is a very fluid situation. The shadow minister would like a situation where the parliament needs to consider any changes. Presumably, if there were an emergency situation, he would like to see the parliament recalled in order to change the legislation and not give the minister the power to change the regulations. That is a view we reject completely in this House and we will reject it in the other house. We will continue to vigorously argue for the legislation. I commend the bill to the House.

Question agreed to.

Bill read a second time.