Nick Sherry (Tasmania, Australian Labor Party, Minister for Superannuation and Corporate Law) Share this | Hansard source

I am concluding the debate on the Corporations Amendment (Short Selling) Bill 2008. In my conclusion to the debate, I will touch on a number of matters that have been raised by both Senator Coonan and Senator Xenophon. Many of them are the same issues and I believe they will address at least some of the concerns that have been expressed in the contributions to the second reading debate. I want to thank all senators for their contributions to the debate. I want to thank all senators who participated in the Senate Standing Committee on Economics hearings. I also want to thank all of the public servants in Treasury and ASIC and all of the officers of the ASX, who have worked, I have to say, under extraordinarily difficult circumstances in terms of the market to, hopefully, bring this matter to a legislative conclusion at least. It has been an extraordinarily difficult period in the markets in terms of volatility and the unique set of issues that that has confronted us all with. I think it is appropriate to note just how hard the public servants and ASIC officials have had to work in this environment over the last year.

The bill will improve the regulation of short selling while also enhancing the integrity, fairness and transparency of our markets, and it comes after an extensive period of public and industry consultation. The consultation included an initial consultation commencing back in February of this year, which was followed by a full exposure draft period consultation from September this year, and then the Senate Economics Committee inquiry into the bill. So we have had three consultations on the legislation.

I can report that all the non-confidential submissions made to the Treasury consultations are available on the Treasury website and have been since 27 November 2008. Senator Xenophon raised the matter with me. The submissions were also made available to the Senate Economics Committee to assist in their deliberations if submitters provided Treasury with permission to release the submissions to the committee. The public will be able to see that there was strong general support for transparency, but there were a wide range of views on how this disclosure should occur.

As I have mentioned, we face extraordinary times in Australian and global financial markets, in which certainty is much needed and must be supported wherever possible by sound and decisive public policy and legislation. That is what this government has been doing for the last 12 months, and this is exactly what this bill does for the Australian market. Importantly, the bill provides certainty about the powers of the Australian Securities and Investments Commission—commonly known as ASIC—to regulate short selling, and puts beyond doubt ASIC’s recent use of its power to make various class orders in relation to short selling.

The bill also bans naked short selling. There are concerns around increased settlement risk with naked short selling as there are no available securities earmarked for settlement and also around naked short sales causing increased price volatility and 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. The fact that some of the details are set out in regulations will allow the regime to respond rapidly to changes in the market. Whilst these regulations will be developed by Treasury, the key player in the development of these regulations is ASIC. I want to make it clear to the Senate that the key player in the development and details of the regulations is ASIC. It is an independent, arms-length regulator. I think that is important to recognise.

This measure is primarily about certainty and transparency, which will enhance confidence in market integrity. The uncertainty surrounding the activity of covered short sellers in Australian securities is having a significant impact. We have seen significant price declines in some shares, which have caused speculation about the role of short selling. The 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, contributing to price efficiency, and also promote market confidence and integrity.

I welcome the recent review undertaken on the bill by the Senate Standing Committee on Economics. I would like to thank the committee for its timely consideration.

All three elements of the bill that I have outlined are integral to each other and to the whole. The ban on naked short selling is almost universally supported. The decision to require the disclosure of covered short selling is equally widely supported, so there is no fundamental disagreement on those two aspects of the bill. The Australian Securities Exchange, in its submission stated:

ASX agrees that increased transparency, via the proposed legislative amendments, will enhance price discovery and should be enacted …

The Australian Financial Markets Association said, in its submission:

… short selling transparency can enhance market efficiency through the price formation process and enable more effective supervision of market activity.

The Australian Investor Relations Association submission stated:

AIRA is a strong believer in the principle of transparency of market—and corporate—information. All participants in the market (issuers, brokers, investors) should be able to see the true level of short selling that is occurring in the market.

The Chartered Secretaries Australia submission added:

CSA welcomed the release of the Bill by the government. We support the government’s proposal to legislate to increase transparency surrounding the activity of covered short sellers in Australian securities.

…         …         …

CSA believes that higher levels of information to the market concerning covered short sales will assist in keeping the market informed, which in turn may reduce the opportunities for market abuse, as well as enhance investor willingness to participate in the market by removing uncertainty surrounding the level of short selling.

Finally, the Australian Shareholders Association submission stated:

The ASA supports option two—

contained in the bill—

on the basis that transparency of covered short sales should provide:

• for a fairer market;
• the regulators with information to assist in identifying market manipulation;
• confidence to investors.

On the involvement of brokers in the disclosure process, I would direct the Senate to the following: whilst stakeholders indicated a diverse range of views in relation to the method—and I emphasise that it was in relation to the method—of disclosing covered short sale information, critical key stakeholders supported the disclosure of covered short sales through brokers. These importantly included the independent regulator, ASIC, and the independent market supervisor, the Australian Securities Exchange, the ASX.

In terms of the method of disclosure, where there are differing views—and I acknowledge that—I think what is important is that both ASIC, the regulator, and the ASX, the supervisor, believed that this approach was the most appropriate. However, this method of disclosure was also supported in the submissions by the Association of Superannuation Funds of Australia, the Corporations Law Committee of the Business Law Section of the Law Council, Chartered Secretaries Australia, the Australian Shareholders Association, RiskMetrics, the Australian Investor Relations Association and the QBE Insurance Group. And many others have supported this approach directly to me as the minister.

I would like to offer some more detailed views from one of these organisations to illustrate the point. Chartered Secretaries Australia made this clear in their evidence to the Senate inquiry:

CSA agrees with the government that legislative reform should place an obligation on investors to disclose covered short sale transactions to their broker, with the broker in turn being responsible to report this information to the market operator.

The regulatory impact statement for this bill noted that it is expected that the costs under the broker disclosure option would be less—let me emphasise that—than with direct reporting, given that some infrastructure already exists and given the smaller number of brokers. In adopting this option, one of the considerations was the existing infrastructure which can be adapted for broker reporting. One reason for taking this option was to minimise compliance costs around the disclosure in respect of short selling.

The ASX, in evidence to the Senate committee, noted that they are responsible for the conduct of something like 100 brokers but there are ‘tens of thousands of fund managers with investments in ASX stock’. The Business Law Section of the Law Council also raised concerns with investors’ knowledge of the regime and sanctions for noncompliance if direct investor disclosure occurred. This could be a particular problem where investors are located overseas. The prime example is overseas hedge funds. If disclosure by such offshore operators is not via an Australian broker, there is no nexus to our jurisdiction to require reporting and to enforce penalties for breach.

So I think it is important to emphasise that the method of disclosure through brokers has been determined on the basis, firstly, of the existing infrastructure, which can be adapted—so the compliance costs would be less—and, secondly, of ensuring the most robust and comprehensive regime that is possible in the circumstances. The view of the ASX and others is that by doing it any other way we would not obtain the comprehensive data, and I have given the example of overseas investors and hedge funds. So the conclusion is that the broker route will deliver the most comprehensive and cost-effective method of collecting the data.

It is important to point out that ASIC have already commenced gathering short-selling data using the broker method. They have put in place a temporary regime, which, in large part, does rely on goodwill. Of course, what is important is that there is certainty going forward. The bill builds on this with important penalty provisions for breaching the disclosure requirements. ASIC have introduced the broker disclosure requirement for the reasons I have outlined. Data is now being regularly published in the Australian Financial Review for those who want to examine it. This is the first time we have had such data in Australia. As I have said, it depends, to some extent, on goodwill, and of course there are no penalty provisions. The introduction of penalty provisions, which are contained in the bill, for breaching a disclosure regime is one of the reasons this legislation is important, as well as certainty.

The passage of the bill will also constitute a binding decision by parliament that disclosure of covered short sales will be required. It will provide certainty for industry as to this principal point. Senator Coonan touched on some of the issues around the length of time. It is referred to as T plus 1—the day after. This is why we bring this critical bill to the parliament today. It is urgent, because it establishes the framework, the certainty. Following on from this, the regulations and the discussions with industry about the regulations will be concluded, and I will come back to that in a short time. It is about delivering certainty to the regulator in current market circumstances in order to ensure that their current temporary regime has legal underpinning. The set of principal rules that guide the approach cover:  (a) what is and what is not permitted; (b) with regard to what is permitted, how and by whom it has to be disclosed; and (c) what the penalties are for a breach.

This scheme is very clear and is appropriate for a piece of legislation. Sitting below this will be the regulations, which will contain regulatory details such as the frequency of public disclosure where the data is disclosed as net, gross or both and details of the timeliness of disclosure. The need for the market to be fed different angles of data does change over time. At present ASIC is requiring T plus 1, daily gross reporting and publication. The regulations may or may not replicate this, depending on the consultations. It is very appropriate that this sort of detail is contained in the regulations because over the coming years the regulator, ASIC, may need to change details of how the information is gathered and published. I emphasise the point: we cannot have regulations until we have the legal framework in the legislation. I know some have advocated removing section 3. If that were the approach—and I am pleased it is not—that was to be adopted, you would not have the legal framework in section 3 to prepare the regulations. That is why it is important to have that legal certainty, as well as ensuring that ASIC’s general powers and the penalty provisions are contained in the legislation, as I referred to earlier.

Importantly, circumstances may change and the independent market regulator and supervisor, the ASX, may advise of the need to shift the parameters of reporting, possibly quickly to ensure market transparency and integrity. Rightly, these are regulatory issues best determined by the regulator; hence, they should be in the regulations. Again, I turn to a submission from industry, in this case from the QBE Insurance Group, which states:

We agree that reporting mechanisms should be dealt with by regulation rather than the legislation itself so as to allow flexibility to respond to the market and other factors.

Finally, on the issue of the role of parliament, I would point out that if the Senate did support the amendment that was moved in the House of Representatives—and we have had indications from the opposition that this is not proceeding—to strike out the whole disclosure regime then what we would end up with would be the existing regime that ASIC, in the interim, have temporarily implemented. And if we were to allow that to continue there would be no role for parliament at all. ASIC do not need parliamentary approval for the regime that they have implemented. The regulations we propose will be fully disallowable by parliament. In addition to the data collected for publication, the regulator, ASIC, through this regime, will have access to a mine of new data to assist in their work detecting market manipulation practices.

Finally, I want to comment on the timing of the bill coming into force, if it is passed today—and Senator Coonan has touched on this. It has been suggested that the bill will not come into force until as late as mid-2009. Apparently, this is an observation made in the Scrutiny of Bills Committee report. This may be a reason to delay its consideration and support. I can report to senators that this is incorrect.

Schedule 1, covering ASIC powers, is effective on royal assent of the bill, which will be, as I understand it, at the next Executive Council meeting as soon as it passes through the parliament. Schedule 2, banning naked short selling, is effective 28 days after royal assent. Schedule 3, establishing the disclosure regimes, is effective on proclamation, but if not proclaimed then it is effective 12 months after royal assent. I can assure senators that the bill will be quickly put before the Executive Council for consideration and that subsequent royal assent of schedule 3 will be progressed to the Executive Council for proclamation with the same urgency.

I can report that the ongoing discussions with various industry groups as to the development of the regulations have gone very well; I cannot say that there will be total agreement, but they have gone very well. Those regulations are expected to be finalised in the very early part of next year—probably February. I do not want to give an absolute commitment, but that is the indication that I have as of tonight. The bill is a critical and responsible part of the Rudd Labor government’s approach to dealing with the global financial crisis. It adds certainty and fills a gap in law that has been left open since 2001. That is not a criticism I make of the now opposition. I do not think that anyone could have anticipated that this gap would occur. (Time expired)