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ASIC asks hedge fundsfor trades amid ‘naked’ shorts crackdown

Hedge funds and investment banks arebeing ordered to produce documents to prove they are complying withshort-selling regulations, as the corporate regulator redoubles itssurveillance efforts amid more volatile markets set off by the global bankingcrisis.

In particular, the Australian Securities and InvestmentsCommission is concerned about short selling occurring without owning orborrowing the underlying shares, an illegal practice known as “naked” shortselling.

ASIC’s latest review into short selling activity is also focusedon the delayed reporting of short sales, which it says are crucial for marketintegrity.

Calissa Aldridge, who leads the market supervision team, saidshort selling was an important component of the market’s price discovery and liquidityfunction, but stressed it needed to be conducted “in a safe way”, especially inperiods of outsized volatility.

“We have a heightened focus on short selling and a moreproactive surveillance approach now because of the increases in volatility in marketsand the sensitivity around US regional banks,” Ms Aldridge said

Naked short selling is banned toensure that trades can be settled. She added the requirement to have cover inplace at the time of entering a short position “also helps to create a littlebit of friction in the system to limit the amount of short selling in themarket, which can be helpful with more extreme volatility”.

“It also acts as a sort of handbrake on the volume of shortsthat we see when you’ve got these extreme moves.”

Ms Aldridge said ASIC was working to review market participantcompliance, adding that unlike in Australia, some foreign markets allowed hedgefunds to “locate” shares after putting on the trade and before settlement.

She said the regulator wanted to ensure there was no confusionthat Australia requires cover in place before putting on a trade.

Morgan Stanley, UBS and Goldman Sachs are among the more activeprime brokers in the market. Barrenjoey is seeking to crack this territory.

Broadly, Ms Aldridge said short selling regulations were beingmet: “The general economic environment means that we may be in this heightenedrisk period for a little while. So we actually want that message out there thatwe’re closely monitoring short sales.

“Most entities are complying. And most participants check thatthe clients who are shorting have got the required cover in place.”

Ms Aldridge said the regulator had begun talking to marketparticipants weeks ago, and will be continuing its enquiries.

This month, the regulator banned Gleneagle Securities’ GregoryTolpigin for three years, after he was found to have engaged in naked shortselling. ASIC found Mr Tolpigin did so on 150 occasions totalling over $7million spanning from January 19 to August 27, 2021.

Mr Tolpigin sold shares on the ASX through accounts held withGleneagle Securities and associated entities. Mr Tolpigin did not own or borrowthe shares at the time he placed the orders.

“Mr Tolpigin’s sales risked settlement failure in the event thathe was unable to buy the shares back prior to settlement, for example, if theshares had been suspended from trading,” the regulator said.