Published September 23, 2008

Aussie regulator tweaks short-selling ban

Move needed after genuine investors also get tripped up

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(SYDNEY/WASHINGTON) Australia's stock exchange was thrown into confusion yesterday after a last- minute ban on short-selling, aimed at saving it from an onslaught of selling by global hedge funds, also tripped up genuine investors. The market delayed its opening by nearly one hour as fund managers, which normally lend stocks to short-sellers and had shares out on loan when the ban was announced over the weekend, wondered what to do next.

This follows a similar ruling last Friday by the US Securities and Exchange Commission (SEC) banning all short-selling in the shares of 799 financial companies until Oct 2. Other regulators - including the British, German, French, Dutch, Belgian and Taiwanese - have also cracked down on short-selling.

'We're all flying in the dark,' said Morgan Stanley equity strategist in Australia Gerard Minack. 'We've never seen a market without short-selling.'

After last Friday's close, the Australian Securities and Investment Commission slapped bans on two forms of short-selling, following bans in US and European markets to head off hedge funds eager to profit from the worsening global credit crisis.

The ban included 'covered' short-selling, whereby hedge funds borrow shares from an institutional investor and sell them in the market in the hope of buying them back later at a lower price. The funds then return the shares and take a cash profit. But short-selling is also often used to hedge a genuine investment, in order to protect it from sliding share prices, and many were caught unprepared when the bans suddenly took effect.



Before trading finally began yesterday, the commission ruled that short positions that had already been opened with the aim of hedging an investment would be exempt from the ban.

The short-sale ban boosted the benchmark S&P/ASX 200 index, which ended up 4.5 per cent at 5,020.5 points, extending a 4.3 per cent rally on Friday.

But an adviser to Australia's pension fund industry called for more talks with the regulator, describing short-selling as an important hedging tool that enhanced market liquidity.

'We have identified a range of issues pertaining to market liquidity, potential mandate breaches, efficient price discovery and prudent disclosure,' said the Australian Council for Super Investors.

Meanwhile in the US, the SEC yesterday amended rules requiring hedge fund managers to report their short-sale positions by allowing for a two-week delay before their wagers are publicly disclosed. The change marks a victory for hedge fund managers, who now have more time to profit from their wagers before competitors can copy them.

The New York Stock Exchange has also added 30 stocks of companies that engage in financial services to the short-selling ban. -- Reuters, Bloomberg