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ASIC asks hedge funds for trades amid ‘naked’ shorts crackdown

Jemima WhyteSenior reporter
May 28, 2023 – 2.57pm
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Hedge funds and investment banks are being ordered to produce documents to prove they are complying with short-selling regulations, as the corporate regulator redoubles its surveillance efforts amid more volatile markets set off by the global banking crisis.
In particular, the Australian Securities and Investments Commission is concerned about short selling occurring without owning or borrowing the underlying shares, an illegal practice known as “naked” short selling
ASIC’s latest review into short selling activity is also focused on the delayed reporting of short sales, which it says are crucial for market integrity.
Calissa Aldridge, who leads the market supervision team, said short selling was an important component of the market’s price discovery and liquidity function, but stressed it needed to be conducted “in a safe way”, especially in periods of outsized volatility.
“We have a heightened focus on short selling and a more proactive surveillance approach now because of the increases in volatility in markets and the sensitivity around US regional banks,” Ms Aldridge said
Naked short selling is banned to ensure that trades can be settled. She added the requirement to have cover in place at the time of entering a short position “also helps to create a little bit of friction in the system to limit the amount of short selling in the market, which can be helpful with more extreme volatility”.
“It also acts as a sort of handbrake on the volume of shorts that we see when you’ve got these extreme moves.”
Ms Aldridge said ASIC was working to review market participant compliance, adding that unlike in Australia, some foreign markets allowed hedge funds to “locate” shares after putting on the trade and before settlement.
She said the regulator wanted to ensure there was no confusion that Australia requires cover in place before putting on a trade.
Morgan Stanley, UBS and Goldman Sachs are among the more active prime brokers in the market. Barrenjoey is seeking to crack this territory.
Broadly, Ms Aldridge said short selling regulations were being met: “The general economic environment means that we may be in this heightened risk period for a little while. So we actually want that message out there that we’re closely monitoring short sales
Most entities are complying. And most participants check that the clients who are shorting have got the required cover in place.”
Ms Aldridge said the regulator had begun talking to market participants weeks ago, and will be continuing its enquiries.
This month, the regulator banned Gleneagle Securities’ Gregory Tolpigin for three years, after he was found to have engaged in naked short selling. ASIC found Mr Tolpigin did so on 150 occasions totalling over $7 million spanning from January 19 to August 27, 2021.
Mr Tolpigin sold shares on the ASX through accounts held with Gleneagle Securities and associated entities. Mr Tolpigin did not own or borrow the shares at the time he placed the orders.
“Mr Tolpigin’s sales risked settlement failure in the event that he was unable to buy the shares back prior to settlement, for example, if the shares had been suspended from trading,” the regulator said.