Tough rules proposed for short selling

The Federal Government will permanently ban "naked" short-selling and has introduced legislation to tighten the regulation of credit rating agencies and research houses.

Brokers yesterday said the disclosure rules, designed to keep an accurate register of short-selling in the market, could be awkward to enforce.

They would have to ask clients whether they were selling stock in order to short it, or if they just wanted to get rid of the shares. They would also have to ask whether the short positions were properly covered.

Under a covered short sale, which would remain legal, an investor could borrow shares and sell them, hoping to buy them back at a lower price. A naked short sale occurs when the investor has not borrowed the shares.

Brokers would have to collect details on short sales and pass the information to the Australian Securities Exchange, which would publish a daily list showing how many short positions were taken out against each company.

The Australian Securities and Investments Commission re-affirmed yesterday that it would end a ban on the covered short-selling of shares in non-financial companies from Wednesday.

The Shaw Stockbroking senior dealer Jamie Spiteri said that while the changes might have been necessary, it would be difficult to ask sophisticated investors to detail their sales positions, and the new regulations could discourage investment.

"From a broker point of view one of the impacts that we have experienced here in Australia has been a significant amount of off-shore money which has already been liquidated out of the country," he said. The new compliance rules might add to the exodus, he said.

The Minister for Superannuation and Corporate Law, Nick Sherry, said yesterday ASIC would require credit rating agencies to acquire an Australian Financial Services Licence.

Rating agencies and research houses would also have to issue yearly compliance reports. They would also have to detail their methodology and assumptions.

Rating agencies have come under fire after giving high ratings to investments in US mortgages. Some research houses that monitored failed investment schemes, such as Westpoint, did not detect problems.