Scott Murdoch | September 20, 2008
"FUNDAMENTAL reforms to short-selling regulation in Australia should deliver a much needed dose of confidence into the domestic financial markets, after the Government yesterday joined the global push to reduce risk in major world markets.
From Monday "naked" short selling will be banned temporarily on the local market and "covered" shorts will have to be reported to the ASX.
The crackdown will be extended to traders of covered shorts now having to declare a stock lending agreement is in place.
The changes, which follows moves by the US and UK, come after shorting was blamed for the market's volatile swings since the credit crunch emerged in August.
The volatility continued yesterday, after Wall Street surged 3.86 per cent on Thursday and the local market soared 4.27 per cent, or 196 points, after the US revealed a dramatic plan to create a vehicle to take bad assets off the balance sheets of troubled financial institutions and central banks launched a $225 billion rescue operation.
European markets surged last night with banks up by 20-30 per cent, as investors welcomed the short-selling initiatives.
The Australian short-selling shake-up follows the US move on Thursday to ban naked shorts, while the UK's Financial Services Authority has stopped shorting of financial institutions until early next year.
The Securities and Exchange Commission in the US said most shorts were not illegal, but naked shorts could allow traders to manipulate the market to push down prices. John Corr, the chief investment officer of Fortitude Capital, a Sydney hedge fund, said the volatile market conditions were not just the result of hedge fund investment strategy.
"I think this could provide some short-term relief for the market, but it's one thing to concentrate just on that," Mr Corr said. "We are traders -- we short-sell, we naked short sell, we short-sell a lot of derivatives. But the fundamental investors in the market should not be worried about that. It should not change the view of long-term fundamental investors."
The Treasury is understood to be developing further legislation, due before the end of this year, to put the interim measures into permanent law.
The changes are the Government's most significant financial market reforms and come after six months of debate to ban the risky stock lending practices.
Mr Corr said shorting was part of the market's natural mechanism, despite recent criticism from corporates about hedge funds targeting their stocks. "Australia has a robust financial system and shorting is a legitimate part of that, it helps companies issue innovative products," he said.
Super group IFSA's chief executive, Richard Gilbert, who has been part of the Treasury's consultation process, said the shorting changes would provide market certainty to international investors. "The Government has been cognisant of what's happening overseas and they would have wanted to make sure any excess behaviour there was not translated into Australia," he said.
"This will address any market integrity issues and and make the market more transparent and that is better for investors."
Peak super body ASFA chief executive Pauline Vamos said the interim changes would increase the openness of financial markets, which would be supported by superannuation funds. "As long as there is transparency in there, and everybody understands the risk of the transaction, it makes the market more open," she said.
"Where you have that you have a more orderly market."
A sense of calm returned to the major world markets yesterday, after the US Government indicated it would create an agency to warehouse the risky assets of troubled financial institutions.
In Australia, a powerhouse performance saw the S&P/ASX200 pile on 4.27 per cent or 196.8 points to close at 4804.1 while the All Ordinaries jumped 4.06 per cent, or 188.8 points, to 4840.7. The jump was the strongest one-day gain since January when the markets surged more than 5 per cent, after the futures market mix-up the previous day.
The US plan, devised by Treasury secretary Henry Paulson and Federal Reserve chairman Ben Bernanke, would rotate troubled assets into a holding company.
The regional markets took heart, with the Hang Seng adding 7 per cent and continental European markets stronger last night.
Early indications showed the Dow Jones in New York could open up to 190 points stronger.
UBS's chief economist in Australia, Scott Haslem, said the plan was fundamental reform and not an emergency response to the worsening financial crisis.
The Treasury plan was complemented by the Fed and major central banks pumping $225 billion into the world financial system to ensure liquidity flow.
The establishment of the US agency was seen as significant enough to prompt UBS global asset management to alter its allocation mandates. It recommended the firm become overweight US equities, and reduced its exposure to US treasuries"
http://www.theaustralian.news.com.au/story/0,25197,24373100-643,00.html
I am amused that Poiticians and regulators have defended short selling and denied naked short selling until US and UK get serious because of the crisis now facing economies.
The article reinforces postings on the destruction of Shareholders investments and ultimately the company.
Without regulation it has the ability to destroy the whole system.
OCV
octaviar limited
