Helen Coonan (NSW, Liberal Party, Manager of Opposition Business in the Senate) Share this | Link to this | Hansard source

I will speak briefly on the Corporations Amendment (Short Selling) Bill 2008. At a time of uncertainty and volatility in global financial markets, it is well recognised that governments around the world need to reassess and improve the regulation of corporate and financial markets. It is important that the government’s response to the global financial crisis helps to improve the situation. It is important that the government gets it right. Unfortunately, we do not think the government has handled the financial crisis all that well. The Rudd Labor government is the only major Western government whose actions have actually made the impact of the financial crisis worse.

The coalition supports legislation that improves investor and business confidence in Australia’s regulatory framework for the financial markets. Elements of this bill, in our view, do not quite do this, and I will speak a little bit about that later. Whilst the coalition supports the intentions of this bill, it of course has some gaps, and I will refer to that shortly. The Corporations Amendment (Short Selling) Bill 2008 has three schedules. Schedule 1 of the bill clarifies ASIC’s powers in relation to short selling, and it has coalition support. Schedule 2 of the bill bans naked short selling, and it has coalition support. Schedule 3 of the bill deals with the disclosure of covered short sales and, whilst we have some concerns, which I will outline, we will be supporting schedule 3.

I will now address in a little more detail the individual schedules. According to the explanatory memorandum, the bill aims to clarifies ASIC’s powers in relation to short selling, prohibit naked short selling and provide better disclosure of covered short selling. Short selling is an equities trading technique whereby a trader aims to trade in a manner that will allow them to profit from a falling market. Effectively, a short sale, or ‘going short’, involves a trader selling a stock that he or she does not own with the hope of buying it back at a lower price. The profit comes from the difference between the proceeds of the sale at the higher price and the cost of the acquisition at the lower price.

Short selling can be described as being either naked or covered. Naked short selling occurs when a trader sells a share that he or she does not have in their possession. This can occur because there is a three-day settlement period between when the sale is made and when the share ownership has to be settled. Typically, a trader who engages in naked shorting would seek to sell a share that he or she does not own at a higher price and then use the three-day settlement period to acquire the same share, up to three days later, at a lower price. Effectively, naked short selling means that the trader is selling a share that he or she has not yet acquired.

Covered short selling occurs when a trader seeks to cover a short sale by first borrowing the stock, usually from a super fund or insurance company. When engaging in covered shorting, the trader actually has possession of the share that he or she wishes to short with because of the borrowing arrangement. The trader then sells the borrowed share, later purchasing it back at a lower price to return to the lender.

Why then is the Senate being asked to clarify ASIC’s powers, ban naked short selling and better disclose covered short selling? As short selling involves selling into a falling market, the effect of flooding the market with yet more shares for sale causes share prices to drop even lower. Short selling became somewhat of a bogey earlier this year during the share market decline in January and February. Whilst the merits of short selling is a topical argument among financial professionals, the issue for the government is more about the effective regulation and disclosure of short selling.

Schedule 1 of this bill clarifies ASIC’s powers in relation to short selling. Previously, there have been questions as to whether ASIC or the ASX should regulate short selling. In these uncertain times there does need to be certainty and clarity as to the strength and effectiveness of our regulatory framework. Under schedule 1, ASIC is given the authority to regulate all aspects of short selling. Any confusion over which entity has regulatory oversight for short selling will now be removed, and we support this measure.

Schedule 2 of the bill bans naked short selling outright. However, under schedule 2, ASIC is left with a regulatory carve-out power to allow exemptions to this ban on naked short selling where it sees fit. As naked short selling represents less than two per cent of all sales conducted in Australia, this ban is unlikely to have a major effect on the operation of the financial markets. The first two schedules of this bill are clearly positive measures that will restore some confidence in our regulatory framework. Whilst ASIC and the ASX have already been able to ban and regulate short selling through issuing orders, this legislation will confirm ASIC’s authority.

Schedule 3, however, is a bit more problematic, and we think that is the case on a number of fronts. The coalition strongly supports the concept of an appropriate disclosure regime for short selling, which would lead to enhanced market integrity. We support measures that provide greater transparency and enhanced disclosure. The strength and integrity of the Australian financial markets are of great importance not only to so-called mum and dad investors but also to institutional investors and of course superannuation funds. It is of the utmost importance that there is in place a disclosure regime that provides the basis for a strong and honest marketplace. However, schedule 3 as it stands does not in our view provide certainty, nor does it remove ambiguity. I just want to outline some of our concerns. Although we do not seek to excise schedule 3 from this bill, we do believe that the minister and Treasury need to do some work to sort out what we perceive as the gaps. There are some primary questions which remain unanswered and gaps throughout the schedule which we believe we should bring to the attention of the Senate to look at in this debate. Perhaps the minister might address them in his remarks. We think that, without clarity, they will only provide distortion and uncertainty to an already volatile market.

There are some concerns, as I said, and I will just outline a few of them. We have no indication of whether covered short sales data will be released on a fortnightly basis or a daily basis, amongst other data release models. We know that most industry groups are in favour of the US model where institutional investment managers, super funds, hedge funds and the like report short sales, which are kept confidential for two weeks before being made public. Any such model allows for the protection of both strategic and proprietary trading positions involving short sales as positions are kept confidential for what might be regarded as an appropriate amount of time. The next-day release of data could encourage free riding and may leave stocks susceptible to predatory behaviour. The key point is that certainty is not provided here and we must know how regularly positions will be disclosed and what kind of time lag will exist for disclosure.

Key industry groups would prefer that all covered stock positions be disclosed to the ASX, as market operator, on a timely basis. The disclosure of covered short sales to other brokers—as proposed in option 2 of the government’s exposure draft—where positions are disclosed to the ASX and not to other brokers, could undermine commercial advantages and cause further market deterioration. There are many concerns that option 2 of the exposure draft, where brokers become aware of all short positions, would expose commercially sensitive and active investment research to other participants, and of course this could distort the market and, as I said, encourage free riding. It has been suggested to us that a system flag, formerly used in CHESS by the ASX for stamp duty, could be used to capture or stop lending transactions. This would move the reporting burden from the broker to the market operator who already appears to have an automated system. This system could be used to capture stock lending and therefore enhance the disclosure of short sales.

We know the government’s preferred option 2 of the exposure draft leaves disclosure to the broker. Schedule 3 of the bill suggests, although without certainty, that the financial services licensee, who could actually be an individual broker or a firm, is responsible for disclosing covered short sales. We think more certainty must be provided here. Who will the disclosure requirements actually fall to—the broker, the individual, the fund or the market operator? I would imagine that covered short sales positions would be disclosed on a stock by stock basis—that seems to be one of the few assumptions vested in what otherwise is, I think, an unclear schedule. But the significant question remains: what form of presentation would be required? Will stock tallies be presented on an aggregate total or will it be a daily total?

If stock lending becomes the chosen transaction measure instead of finalised covered short sales, will the total amount of stock lent be required to be disclosed or will it be a daily transaction balance of lending? The same questions apply to finalised covered short sales. Either way the implications for the market are considerable. The way in which these disclosure requirements will operate will change the behaviour of the Australian market permanently, and certainty is of the utmost importance, particularly in what it is no doubt agreed is a somewhat volatile environment.

The schedule also does not stipulate who exactly has to report and when. This would be problematic as there are no threshold indications. As many short sales are conducted by very small operators it is likely that undue administrative costs would eventuate for small market players if they were part of the regime. A substantial holding threshold has been argued to be required by industry and market participants. Industry participants argued that a disclosure exemption for positions accounting for, say, 0.25 per cent or less of the total percentage of the shares could be helpful in exempting small participants from undue administrative costs. Based on this assumption the establishment of an approved list of participants who are permitted to short sell and disclose their positions would create a further level of transparency and a seamless administrative regime.

As you can see, Mr Acting Deputy President, there are some unanswered questions as to how this schedule will operate in a technical and practical sense. Obviously the aim here is to provide certainty to the market. No doubt this will be something that will need to be addressed. Through our discussions with industry and other stakeholders, together with the Senate economics committee inquiry, it has been abundantly clear that there is a concern with the way in which schedule 3 has been drafted and a compelling need to fill in the gaps.

I will just make one more observation regarding the way in which this bill has been presented and the supposed urgency of it being passed. It was looked at, of course, in the Scrutiny of Bills Committee and the latest Alert Digest pointed out that schedule 3 of the bill is to commence on proclamation. We do not know when that will be but, in any event, it will be within 12 months of assent. The explanatory memorandum gives no reason at all in explaining the period of delay of commencement being any longer than six months and the committee has sought advice as to the reason for the delay.

The minister has talked a lot about the need for urgency. We understand that there is a requirement that as much certainty as possible is provided to the market but it is difficult to see, with many gaps in schedule 3, where the case for urgency is when the schedule as it stands does not provide the very certainty being sought for it. So, whilst we are not moving to excise the schedule, we do think it is appropriate to watch closely to see how the government will work out the detail that we consider should have been available at the time we are considering the bill. Apart from those remarks the opposition will support the bill.

Bob Brown (Tasmania, Australian Greens) Share this | Link to this | Hansard source

The Australian Greens support the Corporations Amendment (Short Selling) Bill 2008. However, I flag an amendment, which I will deal with in the committee stage, to ensure shareholders have the ability to say yea or nay to severance payments of $1 million or more for CEOs. I want to put on the record that last Tuesday the Senate asked for a prime ministerial response to his commitment to deal with excessive executive pay and he has not done that. There was a statement available this afternoon. It is a rehash of what we heard last week. I just ask: what is it that has prevented the Prime Minister from making good on statements he made in Peru and at the G20 talks, and that he has made several times here in Australia, that had in them the promise that there was going to be some tackling of those most excessive of executive salary pays which go into the tens of millions of dollars?

The Greens have moved a number of times in this place to put a decent and reasonable curb—that is, if you call $5 million reasonable and decent—on the annual pay of at least those executives who are gaining from the government’s and the parliament’s move to insure banks and financial houses in this country. But that has been turned down by both the Labor Party and the coalition parties on those occasions. The Senate, however, did last week call on the Prime Minister to put some meat on the bones of his commitment, but there is nothing there. I suspect he is going to do absolutely nothing, which shows again the power of the big end of town.

There will be the hope by the Rudd government that, over the Christmas break, it will all go away and that people will get on with doing other things. That is a wan hope, because we will be back to pull the government to account on dealing with these executive pays, which, when you look at them on the global scale, are an incentive to risk-taking—unnecessary risk-taking, at times—adventurism and some of the less prudent decisions which have got the world into the financial mess it is in. It is not the poor people of the world who have done that; it is the most extremely rich people on the planet. But everybody suffers when you get a global crisis like we are getting at the moment.

One of the things we need is better management. If we are going to have multimillion dollar payouts, let us have some equity brought into it and some regulation and some restriction. So I will be moving that amendment during the committee stage of the debate. I understand that there has been a change to the dinner arrangement—which I know is going to come up soon—so I will keep further comment until we come back and go into committee.

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

Helen Coonan (NSW, Liberal Party, Manager of Opposition Business in the Senate) Share this | Link to this | Hansard source

by leave—Prior to the second reading vote, I wish to make a short statement. It was brought to my attention that I may have inadvertently mentioned a figure which is not correct. I do not think that I did, but just in case I did I will state the correct position. When I was addressing the question of thresholds, I said: ‘A substantial holding threshold has been argued to be required by industry and market participants. Industry participants argue that a disclosure exemption for positions accounting for, say’—at this point I thought I said ‘0.25 per cent’ but I may have inadvertently said ‘25 per cent’, which is not what I intended. I want to indicate that I meant to say, ‘0.25 per cent or less of the total percentage of the shares could be helpful in exempting small participants from undue administrative costs’.

Question agreed to.

Bill read a second time.