ASIC comes up short

IF one assumes ASIC boss Tony D'Aloisio to be a logical fellow, then come January 27, the ban on short selling financial stocks should have been lifted, according to a recent article in The Australian. After all, on September 19, the same corporate plod issued a statement approving so-called covered short sales with increased disclosure.

D'Aloisio took fright over the ensuing weekend and, worried that Australia would be targeted by every heinous hedge fund in the world, backtracked completely and banned short selling.

Britain's Financial Services Authority has lifted its ban on shorting financial stocks, noting "market conditions have become less extreme" and – importantly – saying that a string of other policies, such as government bank-deposit guarantees, had somewhat strengthened the position of financial companies.

"We therefore believe the risks posed by short selling in terms of the potential for market abuse and creating disorderly markets have declined," it said. Now, barring a tsunami over the next couple of weeks, there is every reason to assume ASIC will do the same.

This, of course, has not stopped the looney-tune brigade from jumping on to its soap box to proclaim short selling equals market instability and has a direct effect on employment.

The FSA took a different view, noting in its paper that "both economic and empirical studies support" the view that short selling is a legitimate investment technique in normal market conditions.

D'Aloisio's September policy backflip displayed some appalling administrative policies that are still being fixed.

The present disclosure rules are better, but still largely meaningless.

The ASX's new short-selling disclosure rule is marginally better, only because it follows market flows rather than changes in ownership positions.

If you sell a stock short at the beginning of the day and buy it back at the end, only the first trade will be included in the short-selling figures.

The FSA has a temporary disclosure regime on financial stocks that requires net shorting positions equating to more than 0.25 per cent to be disclosed and every 0.1 per cent move thereafter.

This makes eminent sense, but different regulatory regimes have their own advantages. In Britain, because stock lending is exempt from stamp duty, there is an established system for tracking stock lending and equity trades.

Stock loans, of course, are not necessarily the same as shorting, but the RBA is working on a better disclosure regime to maintain market integrity.

It is worried about a repeat of the failed Tricom sales this time last year and is working towards a new transparency regime in the next couple of months.

The fund managers, of course, are fighting the release of their own stock borrowing activity on pure self-interest grounds because these champions of transparency want it everywhere but in their own backyard.

A by-product of the RBA work could, in fact, be a better market-pricing mechanism for stock loans that may itself help to regulate the industry.

But first things first, and it all begins with an open, transparent market, which hopefully the RBA and ASIC, in their separate studies, will achieve.

More >>