The Australian arm of the Alternative Investment Management Association, the hedge fund industry body, has welcomed the lifting on Monday by the Australian Securities and Investment Commis
The Australian arm of the Alternative Investment Management Association, the hedge fund industry body, has welcomed the lifting on Monday by the Australian Securities and Investment Commission of its ban on short selling of financial stocks.
The commission announced that the ban on covered short selling of financial securities would be rescinded from 10 a.m. on May 25. A temporary ban on covered short selling of all securities was imposed on September 21 last year ‘in circumstances of extreme market volatility’, according to the regulator.
ASIC lifted the ban on covered short selling of non-financial securities on November 19 but announced on March 5 that the ban on short selling of financial securities would continue until May 31.
The commission says it has reviewed market conditions and considers that the balance between market efficiency and potential systemic concern has now moved in favour of the ban being lifted.
However, it adds: ‘ASIC notes that the global financial crisis and global recession continues to place pressure on Australia’s markets. ASIC will not hesitate to reimpose the ban immediately and without consultation if it considers market conditions warrant such action.’
The regulator says that in its monitoring of the market along with the Australian Stock Exchange, it will ‘pay particular attention to short selling activity by participants (including by hedge funds and similar institutions) that could potentially harm Australia’s financial system’.
The daily reporting by market participants to the exchange of gross short sales will continue, as will the publication to the market of aggregate short sales the day after trading. The regulator says this disclosure regime will operate until the implementation of permanent disclosure measures laid down by the Australian government.
‘All ASX investors should now see greater liquidity and, absent any detrimental offshore developments, lower volatility due to more participants allowed to trade,’ says Aima Australia chairman Kim Ivey.
The organisation has more than 60 members in Australia including hedge fund and managed futures managers, institutional investors, fund of hedge funds managers, prime brokers, fund administrators, lawyers, auditors and other industry service providers.
‘Australian financial companies, whose shares were being protected from short selling, have demonstrated that they are now in excellent financial shape,’ Ivey says. ‘Australian banks have announced improved operating profits and margins in their 2008-09 earning results.
‘Over AUD30bn in fresh capital has been raised by banks and property companies since the ban was imposed eight months ago. Plus 18 ASX listed companies, whose shares have been open to short selling, are currently undertaking rights issues.
‘This is a clear confirmation that the ban did not need to be in place for eight months and it warranted an immediate removal. Its removal now places Australia on par with other sophisticated markets, unfettered by government intervention that was openly criticised by investors and other regulators. It also removes a major deterrent for investment in talented Australian hedge fund managers who transact on the ASX.’
Ivey argues that short selling is a legitimate investment tool used by not only by hedge funds by asset management firms run by local banks and insurance companies, and condemns the suggestion by the regulator that hedge funds are a source of potential harm to Australia’s financial system.
‘The specific mention of hedge funds [by] ASIC as a market participant that warrants special attention is quite unjustified and unreasonable, in light of the fact that no evidence exists that a hedge fund has ever been in breach of Australian short selling or market manipulation laws,’ he says.
Aima Australia adds that it has long supported the banning of naked short selling on the ASX and continues to work with all stakeholders, including the government’s Treasury department, ASIC and the ASX, to develop a sound and useful methodology for collecting covered short selling data.
