ASIC keeps short-selling ban in chaos-fighting armory

REGULATORS have vowed to impose a fresh ban on short-selling in shares if markets descend into the kind of chaos seen at the time of the global financial crisis.

By InvestSMART · 25 Sep 2012

By InvestSMART ·
25 Sep 2012

Comments

REGULATORS have vowed to impose a fresh ban on short-selling in shares if markets descend into the kind of chaos seen at the time of the global financial crisis.

The Australian Securities and Investments Commission has said it will impose a ban on the practice should market conditions require it.

The warning came as part of a review of a temporary ban on short-selling ASIC imposed on all stocks from September 2008 to November that year, during the GFC, when share plunges were exacerbated by investors looking to profit from volatility. The ban on short-selling for financial stocks, whose health is entwined with the overall stability of the nation's financial system, lasted until May 2009.

Usually linked to hedge funds, short-selling is the practice of speculators selling shares they do not own in the hope of buying the stock back later at a lower price. It is often blamed for creating excessively volatile market conditions and undermining the prices of banks and other financial stocks.

"If a situation arises in the future that involves disorderly markets and action by regulators in other jurisdictions to further restrict short-selling, it is likely that ASIC and the Australian government would again contemplate a ban on short-selling to bolster investor confidence and limit the potential for international regulatory arbitrage," ASIC said as part of its review.

ASIC said the rule changes at the time "broadly met" its regulatory objectives.

"At the height of the global financial crisis, we identified a significant risk that excessive speculative short-selling could have unwarranted, negative consequences for Australia's markets and economy more broadly," ASIC deputy chairman Belinda Gibson said yesterday.

Go to Google News, then click "Follow" button to add us.

Share this article and show your support

Frequently Asked Questions about this Article…

What is short-selling and how does it work?

Short-selling is when speculators sell shares they do not own in the hope of buying them back later at a lower price. The article notes this practice is usually linked to hedge funds and is often blamed for increasing market volatility and driving down prices of banks and other financial stocks.

Why might ASIC impose a short-selling ban in Australian markets?

ASIC has said it would consider a short-selling ban if markets become disorderly in a way similar to the global financial crisis. The regulator says a ban could help bolster investor confidence and limit the potential for international regulatory arbitrage when other jurisdictions also restrict short-selling.

When did ASIC previously ban short-selling during the global financial crisis?

ASIC imposed a temporary ban on short-selling across all stocks from September 2008 to November 2008. A targeted ban on financial stocks, given their systemic importance, lasted until May 2009.

Which types of stocks were specifically affected by the GFC-era short-selling bans?

Initially the ban covered all stocks for a short period in late 2008. Financial stocks were singled out for a longer ban until May 2009 because the health of banks and other financial firms is closely tied to overall financial system stability.

How can short-selling influence everyday investors and market volatility?

According to the article, excessive speculative short-selling can exacerbate share plunges and create excessively volatile market conditions. That volatility can undermine the prices of banks and other financial stocks, which matters to everyday investors holding those shares.

Did ASIC conclude the past short-selling rule changes were effective?

ASIC said the rule changes at the time 'broadly met' its regulatory objectives. The regulator's deputy chairman, Belinda Gibson, said they had identified a significant risk that excessive speculative short-selling could have unwanted negative consequences for Australia's markets and economy.

What specific market conditions could trigger another short-selling ban?

ASIC said it would contemplate a ban if a future situation involved disorderly markets and if regulators in other jurisdictions were also taking steps to restrict short-selling. The aim would be to bolster investor confidence and avoid regulatory arbitrage across borders.

Are hedge funds the only participants who short-sell shares?

The article notes short-selling is usually linked to hedge funds, but it describes the practice more generally as a speculative technique used by traders. It does not state hedge funds are the only participants who short-sell.