Australia’s New Short Selling Disclosure Requirements For Fund Managers

The new Australian short position reporting requirements came into effect from June 1, 2010. Fund managers need to be aware of the short selling reporting requirements when making a short sale in a product. The reporting requirements apply to both Australian and overseas fund managers.

By way of background, the Australian Government introduced new legislative requirements in December 2008 and December 2009, under the Corporations Amendment (Short Selling) Act 2008 and the Corporations Amendment Regulations 2009 (No. 8). The requirements included a ban on naked short selling and a new disclosure regime in relation to covered short selling to replace the interim disclosure requirements introduced by the Australian Securities and Investments Commission (ASIC) in September 2008.

The short selling requirements apply to the following products:

• securities;

• managed investment products;

• debentures, stocks and bonds issued by government;

• derivatives that are transferable; and

• interests in unregistered managed investment schemes.

Prohibition on Naked Short Selling

Naked short selling is where the seller, at the time of the sale, does not have (or reasonably believe he has) a presently exercisable and unconditional right to vest the product in the buyer. Naked short selling of a product is prohibited.

However, certain limited exemptions are currently available to the prohibition. Some of the exceptions that may be of interest to fund managers include:

• reliance on a prior purchase agreement that is subject only to certain conditions before completion;

• reliance on the exercise of an exchange traded option to satisfy the short sale;

• the giving, writing or exercise of certain exchange traded options;

• certain short sales of government bonds and certain prescribed bonds and debentures issued by a body corporate, where the seller acts as principal and believes on reasonable grounds that arrangements can be put in place for settlement by the relevant time;

• where the owner recalls securities or products from a securities lending program; and

• certain exemptions applicable to market makers.

ASIC also has the power to give further relief and may consider issuing individual no-action positions, but generally will do so only to facilitate the orderly operation of markets.

Covered Short Selling Disclosure

Unlike naked short selling, covered short selling is not prohibited.

Covered short selling is where the seller, at the time of sale, has (or reasonably believes he has) a presently exercisable and unconditional right to vest the product in the buyer because of a securities lending arrangement entered into before that time.

If a seller makes a covered short sale of a product on an Australian licensed market (e.g., the ASX), the seller will generally be required to comply with two separate short selling reporting requirements:

• short sale transaction reporting — the reporting of daily volumes of products that are sold short in the market, and

• short position reporting — the reporting of short positions to ASIC.

Short Sale Transaction Reporting

Fund managers, when requesting their brokers to make a covered short sale of a product, are required to give their brokers the following particulars on or before entering into an agreement to sell:

• the number of products that the seller will vest in the buyer under the securities lending arrangement;

• a description of the product; and

• the name of the entity that issued the product.

The broker will then, by no later than 9:00 a.m. on the next trading day, inform the Australian market operator (e.g., the ASX) of the short sale transaction particulars given to him before 7:00 p.m. on the previous trading day.

The Australian market operator will, on the same day that the short sales are reported to it, publicly disclose to the market the total volume of short sales by product executed on the previous trading day.

Short Position Reporting

What Is a Short Position?

The definition of what is a short position was recently updated by ASIC under Class Order 10/464. A seller has a short position in a product where the quantity of the product that a person has is less than the quantity of the product which the person has an obligation to deliver.

A person has the product if:

• the person is holding the product on the person’s own behalf;

• the person holds the product on behalf of another person except where that other person has the sole discretion to decide whether the product will be sold;

• another person is holding the product on the person’s behalf but only where the person has the sole discretion to decide whether the product will be sold;

• the person has entered into an agreement to buy the product but has not received it; or

• the person has vested title in the product in a borrower, or in an entity nominated by the borrower, under a securities lending arrangement.

A person has an obligation to deliver the product where the person:

• has an obligation to deliver under a sale agreement where the product has not been delivered;

• has a contingent or non-contingent obligation to vest title in a lender under a securities lending arrangement; or

• has any other non-contingent legal obligation to deliver.

ASIC is also considering providing clarification as to whether a person who acquires and sells products in multiple capacities (e.g., a person who is a trustee for a number of funds) can net off the short position in one fund with the long position in another fund in its short position calculation of a product.

When Is a Short Position Required to be Reported?

A seller who has a short position in a product as at 7:00 p.m. on a reporting day must provide details of that short position to ASIC by 9:00 a.m. on the third reporting day after the date of the short position. A reporting day is a day on which the Australian licensed market is open for trading.

Sellers are exempt from reporting a short position where the short position is less than $100,000 and 0.01 percent of the total quantity of securities or products in the relevant class of securities or products.

If a seller continues to hold a reportable short position on subsequent reporting days, the seller is required to provide daily reports to ASIC on the size of the short position (even if it is unchanged) by 9:00 a.m. on the third reporting day after that date.

How Are Short Positions Reported to ASIC?

Short sellers who do not have an Australian Company Number (ACN), Australian Registered Body Number (ARBN), or a SWIFT Bank Identifier Code (BIC) must register with ASIC to get a unique identifier before they can submit short position reports.

Short position reports to ASIC must be via the Financial Information eXchange (FIX) protocol “position report” messages. A list of third party providers offering reporting solutions is available on the ASIC website under Information Sheet 98 — “Short selling: Short position reporting”.

Aggregated short positions by product are then publicly disclosed by ASIC on its website on the fourth reporting day from the date of the short position.

Stephen Etkind is a Partner and Henry Wong is a Senior Associate with Minter Ellison, Sydney. They may be contacted at stephen.etkind@minterellison.com and henry.wong@minterellison.com.