THE Government has moved to allay confusion surrounding short-selling with the release of planned disclosure rules, as regulators continued to tweak with the temporary ban.
The Australian Securities and Investments Commission added further exemptions to its blanket ban on short-selling yesterday, which it insists is necessary to protect Australian equities. It will now allow short-selling it views as legitimate.
But the ban is rankling some market participants, with one industry body calling for the ban to end on October 3, in line with the US market regulator's timetable. Initially ASIC's ban was to last 30 days, but BusinessDay believes the ban is under constant review and may be lifted earlier.
"From a theoretical free-market point of view, it's probably not textbook material," said Pengana Capital institutional business consultant Denis Carroll. "But I think, to paraphrase, that the medicine is probably better than the disease."
ASX data showed reported short sales fell dramatically on Monday as hedge funds and others pulled out of the trades.
Before this week's bans, the Reserve Bank estimated short-selling made up about 4% of the market's capitalisation, or about $60 billion, as of December 2007.
But investment professionals who use short-selling said Australia's ban on all short-selling, rather than just financial stocks, would damage the country's chances of becoming a financial services hub.
Covered short-selling refers to the sale of shares a trader has borrowed then sold in the hope of buying them back, and returning them, at a lower price. Naked short-selling refers to the same process, except the seller has not yet arranged to borrow the shares.
In the US, Britain, France, Germany, Ireland and Canada's Ontario province, regulators have prohibited naked short-selling as well as covered short-selling on financial stocks.
"In my view it will be seen as a severe overreaction and something that actually damaged perceptions of the Australian investment market," said Select Asset Management chief investment officer Dominic McCormick.
Meanwhile, investors are waiting for news from the US, where regulators have begun two days of intensive congressional hearings as they try to iron out details of Treasury Secretary Henry Paulson's $US700 billion ($A840 billion) bail-out plan. The plan would allow the US Treasury to buy noxious mortgage-related debt from financial groups.
But markets, which were initially euphoric, were "sobering up", said National Australia Bank chief markets economist Rob Henderson.
BNP Paribas analysts said if the rescue package were to fail, the next stage would be widespread panic and more failures of the big banks, which would eat away at the real economy.
The S&P/ASX 200 Index yesterday fell 97 points, or 1.9%, to 4923.5 points.
Yesterday Minister for Corporate Law Senator Nick Sherry released draft legislation that will permanently close a regulatory gap that had allowed naked short-selling before ASIC's action last Friday, and will ensure greater disclosure of the extent of covered short-selling on individual stocks.
Under the draft bill, investors would notify their broker if they were taking a short position and the broker would notify the market supervisor, the ASX.
The structure mirrors the interim system ASIC put in place on Friday.
The "precise details" of the proposed new regime were yet to be finalised, including the required timing of disclosure of a short-sale transaction.
The Investment and Financial Services Association welcomed the draft bill's release but called on ASIC to drop the ban on short-selling in just 10 days.
