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http://www.theaustralian.news.com.au/story/0,25197,24408480-643,00.html

Font Size: Decrease Increase Print Page: Print Scott Murdoch | September 27, 2008
THE executives of a Sydney fund manager had an irate cornerstone investor from New York on the phone this week asking why the Australian corporate regulator had made "policy on the run".

The ban on shorting has sent markets into disarray, with some hedge funds almost frozen and secondary options and derivatives markets grinding to a halt.

The reputation of Australia's capital markets has been called into question globally since the surprisingly tough move to apply the wholesale ban on shorting.

After the markets closed on a rare positive note on Friday last week, most traders welcomed ASIC's temporary ban.

The corporate regulator had planned only to prohibit naked short selling, in which the stock is not borrowed but bought when the price falls -- a practice not common in Australia.

It had planned, on top of that, to require reporting of covered short positions, which met the demands of the industry, in a bid to increase transparency of short trades. The thinking was that the market would operate in a more orderly and efficient way once investors knew the exact volume of short positions that were held.

However, ASIC and the Government were pushed into a tight corner after the FSA in Britain and the US's SEC announced broad measures to ban shorting in financial stocks.

Opinion in the market was that if ASIC did not bring down an overarching ban, come the opening of trade on Monday morning the Australian market would be comprehensively smashed as international hedge funds moved their short positions here.

Ray Schoer, the former head of ASIC predecessor the National Companies and Securities Commission, said stock shorting was a deliberate attempt by some investors to influence the market's direction. "I don't think that shorts should be taken without transparency and a regulatory framework, and that does not exist at the moment," he said.

"There has to be a proper regulatory framework. The people who are selling short must be able to explain what they are doing, because it puts everyone else in the market at a disadvantage."

Instead, the ban created havoc. In an unprecedented move, the opening of trade was halted and ASIC had to drip-feed exemptions to clear up the intense confusion.

Trading rooms and dealers on the options and derivatives markets were divided as to whether shorts could be written to offset risk held in other asset classes.

The confusion came on top of persistent phone calls from New York investors puzzled as to why the Australian ban went further than anywhere else.

The practice of hedging to the secondary markets came to an end, and it was hedge funds that felt the worst effects.

Fortitude Capital chief investment officer John Corr said the funds were still confused a week into the ban, with investment activity well down. The volume of trade on the ASX has taken a hit, with cash equity trades down by more than 100,000 on individual days during the week. The number of contract for difference trades is down almost two-thirds.

"Confusion is still a major problem. Our advice from ASIC, independent legal advice, and compliance at brokers and banks varies dramatically," Mr Corr said. "This is stopping us and others from trading. We are still spending time talking to offshore investors who are quizzical as to future regulation risk in Australia. Usually this is reserved for developing markets."

The Australian decision has been criticised in light of moves by Chinese authorities to allow shorting in a bid to create liquidity in their tightly held capital markets.

The major concerns about the domestic short ban centre on the shrinking of liquidity in the Australian market.

In China, short positions will only be allowed in stocks with market capitalisation of more than 800 million yuan and stable share prices. "This illustrates our concern on how the perception of Australia is affected," Mr Corr said of the Chinese move.


The ASIC decision has been labelled policy on the run this week, particularly after the agency had to issue a number of clarifications.

All involved in the process have been quick to sheet home blame for the confusion mainly to ASIC boss Tony D'Aloisio.

Treasurer Wayne Swan is understood to have gauged the reaction of the major bank bosses last weekend on the prospect of the all-in shorting ban.

The most intense lobbying for the measure came from Macquarie Group, which hit the phones to Canberra, using its sheer size to press for the change.

The Treasurer rejects the suggestion that the Government bowed to Macquarie's lobbying, but speculation swept the markets that senior Macquarie executives were in danger of being margin called if the stock was shorted further.

Swan and Corporate Law Minister Nick Sherry backed the ASIC move, despite it bringing secondary markets to a virtual halt.

"ASIC and the ASX acted in the best interests of the market as a whole, not the hedge funds but the market," Senator Sherry said this week.

Opposition Treasury spokeswoman Julie Bishop said the regulatory confusion had damaged the local market's reputation among global investors.

There is speculation that the ban will be lifted before the 30-day review, but ASIC has not given any official indication of itsplans.

"Wayne Swan must accept full responsibility for the botched handling of the introduction of controls on short selling," Ms Bishop said.

"Since its first statement the Government has issued a succession of changes and exceptions that have left the financial markets bewildered, uncertain and frustrated.

"There has been ongoing chaos and confusion, as ASIC has been forced to issue further clarifications and provide exceptions to the Government's changing position."

Investment and Financial Services Association deputy chief executive John O'Shaughnessy said there was evidence that the ban had affected the performance of traditional fund managers that ran normal long and short operations.

"There is an issue that both long and short funds, and funds that have shorts in their mandates, are not excused," he said.

"This is not about the fringes of the industry."