Australia's financial services regulator, ASIC, has extended the ban on covered short sales of financial stocks until March 6th, 2009. The ban, which was due to be lifted on 27th January, was extended due to renewed volatility in financial stocks in the US and Europe.
ASIC's decision will no doubt please some, and disappoint others, including those investors who have sold stock ahead of the expected lifting of the ban and in anticipation of further price weakness. However, the renewed volatility in bank and financial stock prices overseas has probably had more to do with additional and continuing bad news in the sector than the resumption of short selling.
In their statement released on 21 January, ASIC said:
'ASIC today said it would keep the ban on covered short selling of financial securities in place until Friday, 6 March 2009.
ASIC advised the market on 13 November 2008 that the current ban on covered short selling of financial securities (as defined in ASIC’s release of 13 November 2008) would remain in place until at least 27 January 2009.
This approach was consistent with many other jurisdictions, including the UK, where the Financial Services Authority (FSA) planned to lift its short selling ban on certain financial securities on 16 January 2009.
The FSA lifted its ban on 16 January 2009 and ASIC expected to then lift its ban, so as to be in line with the other major markets.
ASIC, however, noted the recent increase in volatility in financial stocks in overseas markets. ASIC is not at this stage in a position to assess if the resumption of short selling in the UK was coincidental or contributed to this volatility and if so, to what extent.
As many factors are at play in these overseas markets, ASIC needs time to examine these latest developments. ASIC will therefore, over the next few weeks, assess the markets more carefully to determine the role of short selling and aggressive or predatory practices and whether there are similar risks for Australia when the ban is lifted.
ASIC believes that in the context of the renewed volatility affecting banking stocks in many markets, including the UK and USA, this cautious approach is warranted. ASIC believes that any possible loss of market efficiency or price discovery as a result of this additional short period of review is therefore justified.
ASIC’s decision to extend the ban on covered short selling of financial securities is also in the context of a legislative framework that recognises short selling as a legitimate mechanism of price discovery and liquidity, subject to disclosure and subject to intervention by ASIC in exceptional cases.
ASIC’s intention is and remains to keep its intervention to an absolute minimum. ASIC will continue its consultations with relevant stakeholders and other regulators in Australia and overseas.
ASIC will keep the position under review, and might decide it has sufficient information to be able to lift the ban earlier than 6 March, and will make a decision for 6 March closer to that date.'
