Shorting decision on cards

News of the impending release of the regulations comes as the Australian Securities and Investments Commission weighs up whether to lift an eight-month ban on short-selling of financial stocks, with the prohibition now in place due to expire at the end of this week.

Senator Sherry, who argued that the latest extension of the ban in March was in the national interest, would not be drawn on whether the ban should be extended again.

But he said he expected that regulations setting out new disclosure rules for short-selling would be on his desk within days, and publicly released within weeks.

"The regulations are all but finished," Senator Sherry said, speaking after an Association of Financial Advisers lunch in Melbourne last week.

The regulations will augment legislation passed by the Government late last year that banned naked short-selling and required covered short-selling to be disclosed.

Their release was delayed because of what Senator Sherry referred to in February as "vigorously contested" views about several issues, "in particular the time frame for disclosure".

When and how short-selling data should be disclosed is a much-debated aspect of the new regime. While some argue that daily public disclosure would improve market transparency, many fund managers want short-selling data released fortnightly or even monthly, fearing daily disclosure would betray investment strategies and spark rumours in the market.

Under an interim regime put in place by ASIC, reports on short-selling of individual stocks are published the following day. That regime will run until the new regulations are adopted.

ASIC, along with other securities regulators around the world, banned all short-selling in Australian shares in September last year as the collapse of Lehman Brothers sparked huge volatility in markets and rumours about which institutions might collapse next.

ASIC lifted the ban for non-financial stocks in November but repeatedly extended the ban on short-selling financial stocks as other jurisdictions, including the US and Britain, lifted theirs.

Covered short-selling occurs when traders borrow a share and then sell it in the hope they will be able to buy it back at a cheaper price and pocket the difference. Naked short-selling is when traders have not made arrangements to borrow the share before they trade it.

Supporters of short-selling say it adds to market liquidity and assists price discovery. But its detractors say it enables hedge funds to aggressively attack company share prices, to the detriment of other investors.

Australia's new regulations are expected to be guided by a report by the International Organisation of Securities Commissions, released in March, which called for timely reporting of short-selling positions, with some form of disclosure to the market - or at least the market authority.