ASIC stands ready to reimpose ban on short-selling

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

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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 that 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," the ASIC deputy chairman Belinda Gibson said yesterday.

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Frequently Asked Questions about this Article…

What is ASIC’s stance on imposing a short selling ban in Australia?

ASIC has said it stands ready to impose a ban on short selling if market conditions deteriorate into disorder similar to the global financial crisis. The regulator indicated it would consider a ban to bolster investor confidence and limit the potential for international regulatory arbitrage.

What happened during the temporary short selling ban in the global financial crisis?

During the global financial crisis, ASIC temporarily banned short selling of all stocks from September 2008 to November 2008, and a ban on financial stocks lasted until May 2009, after regulators worried short sellers were exacerbating share plunges.

What is short selling and who typically does it?

Short selling is when speculators sell shares they do not own in the hope of buying them back later at a lower price; the practice is often linked to hedge funds and other speculative traders.

Why do some people blame short selling for market volatility?

Short selling is often blamed for creating excessive volatility and for pushing down prices of banks and other financial stocks, which regulators said could have unwarranted negative consequences for markets and the broader economy.

How would a short selling ban help everyday investors?

ASIC says a ban would be aimed at bolstering investor confidence and preventing disorderly market conditions; in other words, it’s intended to reduce extreme speculative pressure that can deepen market declines.

Could actions by overseas regulators trigger a short selling ban in Australia?

Yes. ASIC said if other jurisdictions move to further restrict short selling during disorderly markets, Australia would likely contemplate similar measures to avoid international regulatory arbitrage and to protect market stability.

Did ASIC assess whether the 2008–2009 rule changes worked?

Yes. ASIC said the rule changes made at the time 'broadly met' its regulatory objectives, according to its review of the temporary ban.

What signs should everyday investors watch for that might lead to a renewed short selling ban?

Investors should watch for disorderly market conditions, sharp share plunges—especially in financial stocks—and coordinated regulatory action overseas, since ASIC said those factors could prompt it to contemplate reimposing a ban.