ASIC Ends Ban On Short Selling

Post by Sharat on May 25, 2009 · Under Australian Economy, Capital Markets, Equities, investments · Comment

ASIC, the Australian securities regulator ended the eight month long ban on the short selling of financial stocks in the wake of the recovery and stability of global equity prices and in particular banking and financial stocks. The regulator however warned that it would counter any threat to the stability of Australian financial stocks by reinstating the ban.

ASIC said on Monday that it will continue to monitor short selling activities of all market participants including that of hedge funds.

“ASIC has reviewed market conditions and considers that the balance between market efficiency and potential systemic concern has now moved in favour of the ban being lifted,” the regulator said in its statement.

Equity markets around the world have rallied substantially since the banking crisis reached fever pitch towards the end of last year and beginning of this year, and the stability of equity prices seems to suggest that the worst of the crisis has now passed, which has allowed Australia’s big four banks to raise capital, and strengthen their balance sheets in the face of a weaker economy.

The regulator said it would continue to remain vigilant, noting that recession continues to weigh heavily on Australian financial markets.
“ASIC will not hesitate to re-impose the ban immediately and without consultation if it considers market conditions warrant such action,” it said.

The market response to the lifting of the ban was relatively muted with some modest selling pressure evident in select financial stocks on the back of the news. Key banking stocks, including Commonwealth Bank of Australia and Westpac Banking Corp were slightly lower, however volumes traded across the market were relatively low ahead of the Memorial Day holiday in the U.S. this evening, traders said.

Short selling is the practice of borrowing and then selling stock that is not owned, in the hope that prices will fall allowing the seller to buy back the stock at a lower price than they sold it for to begin with, and return it to the institution they borrowed it from and pocketing the difference as a profit.

ASIC initially implemented a blanket ban on short sales of any stock in the immediate aftermath of the Lehman Brothers default as a measure to counter what was nothing short of a panic and a stampede by global investors. In November ASIC partially lifted the ban on short selling, keeping in place a ban on the short selling of financial stocks, and by the end of the year Australia had outlawed the practice of naked short selling. Naked short sales, occur when the investor sells the stock without having an agreement in place to borrow the stock.

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