In a crackdown on traders who bet stocks will fall, Australian regulators have effectively banned naked short sales and introduced stricter disclosure rules for covered short selling.
The Australian Securities Exchange (ASX) said today it would remove all securities from its list of stocks approved for naked short selling from Monday, adding the removal will remain in force "until further notice.''
The move follows similar steps by overseas regulators and is an effort to curb excessive volatility in financial markets following this week's turmoil.
Short selling has been blamed for some of the big losses in the past days, including the pounding of Macquarie on Thursday when the shares lost more than 20% in their worts-ever daily slump.
Short sellers try to profit by betting stock prices will fall. In a short sale, traders borrow shares from their broker that they then sell. If the price drops, they buy back the stock, return it to their broker and pocket the difference.
In naked short selling, traders never actually borrow the shares, raising concerns that investors are flooding markets with sell orders to drive down prices.
In a guide also released today, the Australian Securities and Investment Commission defines the practice. It says a naked short sale occurs unless the seller has a "presently and unconditional right to vest", which means a legally binding commitment is required from another party such as a stock lender before the sale is entered into.
The regulator said it would not accept an informal promise to locate stock before settlement day as sufficient for this purpose. "Day traders will need stock to sell before any sale," it said.
ASIC also introduced reporting requirements for covered short sales which continue to be permitted and clarified the meaning of a covered short sale.
In a covered short sale the seller "must have a presently exercisable and unconditional right to vest'', ASIC said.
A customer will be obliged to inform the broker that a transaction is a covered short sale of this type and the broker then must inform the ASX.
ASX will inform each morning on short sales that are reported to it for the previous day, ASIC said.
"The decision has been taken to implement these interim measures to maintain confidence in our markets in the face of international turmoil and to complement moves made by the other regulatory agencies,'' ASIC chairman Tony D'Aloisio said in the statement.
Both the US Security and Exchange Commission and the UK Financial Services Authority have in the past days announced new rules to regulate short selling.
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