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Temporary Short-Selling Ban

Post-implementation Review - Australian Securities and Investments Commission

On 19 September 2008 the Australian Securities and Investments Commission (ASIC) announced interim short-selling measures. These measures included the temporary banning, with some exemptions, of covered short-selling of securities and managed investment products able to be traded on a financial market (stocks) from 21 October until 13 November 2008, with the ban on certain financial stocks lasting until 25 May 2009; and the imposition of an interim reporting regime for permitted, covered short sales. A Prime Minister’s exemption was granted from the requirement to complete a Regulation Impact Statement (RIS) for the measures in 2008. Consequently, a Post-implementation Review (PIR) was required to be undertaken in line with the Government’s Best Practice Regulation process. The objectives of these measures were to: maintain orderly functioning of the Australian financial market by implementing measures and appropriate exceptions to regulate short selling; enhance confidence and integrity in the Australian financial market by providing greater transparency of short-selling for investors and market participants; and avoid extreme share price movements that might have occurred in the Australian market had Australia maintained policies in respect of short-selling that were more permissive of the practice than international peers at that time. The PIR assessed the effectiveness of the policy in meeting these objectives. It was found that the measures reduced trading activity of Australian stocks; increased bid-ask spreads; reduced liquidity; increased price volatility; and contributed to a decline in the number of settlement failures. Additionally, a causal relationship between the measures and stock prices could not be determined. However, it was noted that as a general rule, short-sellers appear to have shorted stocks that were already declining in price (rather than rises in short selling activity leading to or causing stock price declines). Finally, it was found that longer-term investors may have benefitted from the measures, while industries that depended on the demand of short-sellers for borrowed stock suffered as a result of the interim measures. Consequently, the PIR found that the interim measures only partially achieved the government’s objectives. The PIR was prepared by the Australian Securities and Investments Commission (ASIC) and assessed as adequate by the Office of Best Practice Regulation.