Short-selling ban extension is best for the national interest, says minister

But the extension of the ban, which covers banking and financial stocks only, means that three of the four big banks and embattled Macquarie Bank will release profits in coming weeks untroubled by short-sellers.

Each of the big banks are expected to reveal profits under pressure as bad debts rise, while Macquarie has flagged further heavy write-downs across its listed property funds.

The decision by the Australian Securities and Investments Commission was expected, especially in the wake of reports that foreign hedge funds would aggressively short-sell Australian banks if the ban was lifted.

But it comes only days after a commissioner of the US Securities and Exchange Commission revealed that a short-selling ban in the US had sparked significant market distortions, and arguments from the investment industry that Australia's ban was reducing liquidity and hampering the efficient workings of the market.

And it also comes amid evidence that traders are circumventing the restrictions with the use of derivative instruments.

ASIC's ban is now due to expire at the end of May, although it said in a statement it would keep it under review. ASIC said it had "weighed up" global market volatility, and potential predatory behaviour by short-sellers, against the "possible loss of some market efficiency or price discovery".

"We welcome any additional steps that further boost stability in these difficult conditions," said Corporate Law Minister Nick Sherry. "This is a decision made firmly in the national interest and regardless of any sectoral interests."

ASIC also promised that it would "not hesitate to act" if it discovered traders were trying to circumvent the ban. Earlier this week, ASIC chairman Tony D'Aloisio said ASIC was investigating the matter, and Senator Sherry said he would "speedily" act on any request for assistance from ASIC.

ASIC would not comment further on its reasons for extending the ban, providing no response to questions submitted by BusinessDay yesterday.

The decision was welcomed by the Australian Bankers Association, which said it was "sensible". But the two major industry groups opposed to the move - the Investment and Financial Services Association, and the hedge funds' Alternative Investment Management Association - said they had expected the decision but were disappointed.

Both argue that the ban has reduced liquidity in the market and made it less efficient.

"We are not surprised the ban was extended, but we are surprised at the reasons they are giving," AIMA chairman Kim Ivey said. He thought the ban was extended to give time for the disclosure rules to be finished, in consultation with regulators overseas.

The Government is working on the keenly anticipated details of its new short-selling disclosure regime.

The Federal Opposition argued the short-selling extension was, in fact, "partly forced" by the fact that the Government had not finished the rules, a charge Senator Sherry rejected on the grounds that ASIC had a "strong" interim process in place.

The Securities and Derivatives Industry Association, which represents stockbrokers, said it backed the ban extension, but added that it should be lifted "as soon as circumstances allow". It also said it looked forward to "certainty" being delivered with the new disclosure rules.

ASIC's original ban, like those imposed by other securities regulators around the world, was put in place in September as Lehman Brothers collapsed and markets plunged around the world.

The ban originally extended to all shares, but was reduced to only financial stocks in January.

Most other markets, including the US and Britain, have removed short-selling bans.