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Wednesday, 26 November 2008
Page: 11487

Mr RIPOLL (12:45 PM) —It is a pleasure for me to speak on the Corporations Amendment (Short Selling) Bill 2008. This bill is part of a suite of bills, packages and changes that the government is putting forward to deal with the economic circumstances that we find ourselves in. These dire circumstances are global and need strong, decisive action—which is something we have heard many times in this House but which is true nonetheless. We need a government that is able to respond to evolving global financial circumstances that are largely out of our control. The things that we can control are the things that we should be acting on, and this bill is part of that action.

The bill essentially does three key things. Firstly, it will clarify the ability of the Australian Securities and Investments Commission to regulate short selling. That will put beyond doubt the validity of ASIC’s recent class audit in relation to short selling. That will mean that people will have clarity about ASIC’s role and its ability to regulate in that area. The bill also bans naked short selling. ASIC has the power to grant exemptions from this ban, but it is used in limited circumstances and under special conditions, which I will talk about in a moment. Thirdly, the bill establishes a disclosure regime for covered short sales which are supported by the securities lending arrangements.

The bill aims to do a number of things, but particularly important to all three of its aims is providing clarity, certainty and stability to a market which is under great stress and volatility. You only have to look at market movements today to see the volatility and instability that exist. You have major companies such as Rio Tinto, whose share price fell some 20 or 30 per cent today alone, and you have other companies like Citigroup in the United States, which had a massive fall just weeks ago only to rebound 60 per cent yesterday. So there is this great volatility that exists in the market. The role that we have as a government is to bring about the regulatory framework to give confidence and stability and deal with circumstances as they arise. In certain circumstances, such as those which we find ourselves in now with the global financial crisis, you have to act quickly and decisively—and that is exactly what we are doing.

The first schedule of the bill will amend the Corporations Act to clarify ASIC’s power to regulate short selling. The Corporations Act grants ASIC the general power to omit, modify or vary certain parts of the Corporations Act through declarations. The amendments specify how that is done and how it applies to short selling. The amendments will make it clear that ASIC has the power to do that and to regulate all aspects of short selling, including the prohibition of transactions and imposing or varying requirements on certain transactions. These powers will also extend to transactions with the same or substantially similar market effect as short selling—meaning products and particular instruments that are very much the same as what would be known or described as short selling. I will also briefly discuss those definitions.

The amendments also expressly state that the short-selling declarations made by ASIC earlier this year were within the scope of ASIC’s general power—they were within the scope of powers that currently exist within ASIC. The amendments confirm that the declarations were within the power that ASIC could exercise in certain circumstances. The bill clarifies that. We have done that and supported ASIC because ASIC’s actions were necessary in light of the high levels of volatility not only around the globe but right here in Australia. It is in line with the international regulatory developments occurring in global financial markets at this time. So Australia is not stepping out of current practice in terms of trying to deal with unseen or unheard consequences in this area. These amendments aim to avoid doubt. They provide clarity and certainty and restore as best as possible stability and confidence in the market so that people can understand the circumstances by which short selling could take place, where it is banned and where it is not banned, and perhaps prevent what could be seen by some as market abuses or exploitation of the market, particularly in these very difficult times.

Schedule 2 of the bill amends the Corporations Act to repeal the exemptions that generally allow for naked short selling. These exemptions relate in particular to odd lot transactions, to arbitrage transactions and to transactions where arrangements have been made before the time of the sale that will enable delivery of the product in time for the settlement as well as transactions made under a declaration from the operator of a licensed market in accordance with the operating rules of that particular market. This effectively establishes a prohibition against naked short selling, a short sell where the person does not actually own, has not borrowed or does not in any way hold the securities which they are selling onto the market. There is the power to allow naked short sells if it is considered appropriate, and it is envisaged that ASIC will use this power to allow some non-speculative, naked short selling that is necessary to ensure continuity of ordinary operation of Australian financial markets. So there are circumstances in which it is acceptable.

I am the Chair of the Joint Committee on Corporations and Financial Services and in June of this year the committee brought down rote a report entitled Better shareholders-better company: shareholder engagement and participation in Australia. One of the areas of interest to the committee and of interest to the many people who made submissions to the inquiry was the issue of short selling. It came up in the perspective of being topical at that time in June. It still had not quite hit at that time quite hard enough globally or here in Australia for it to become such an issue that it required immediate government action, although the government was already working on looking at the circumstances in which things such as short selling were adversely impacting on the market and the contributions that that practice makes to the market.

In the committee report we looked at the covered short-selling exercises, which describes the practice where shares that are being traded are borrowed shares and their commissions are paid. It is a not unusual practice and it is a practice that was completely within the right of people to use. It is a practice where, within a certain time, a short seller could repurchase the shares at a lower price than they had borrowed them at and then they could make a profit on the difference or the arbitrage, as it were. Naked short selling differs quite a bit in that it involves someone agreeing to sell a stock that they do not hold. They neither own it nor have borrowed it so have no coverage over that particular stock, which in itself could prove—and did prove in some circumstances—to be problematic for the market.

We saw a number of circumstances where Australian companies as well as international companies were markedly affected and impacted upon by short selling. In normal market circumstances you would not necessarily—and people did not—take a dim view. Short selling was seen as a normal instrument of the market whereby it was used to create liquidity, to allow for good trading and continuation of the market and of specific shares in companies and often worked to the advantage of shareholders, although at times it could work against the interests of shareholders. There had always been some voices who were concerned about the practice, but there were a number of rules regarding how the practice took place.

Times have changed, and that is the bottom line. Circumstances have changed. Global financial markets have changed. We now need to act in a decisive manner to ensure that we restore confidence in the markets. Amongst the findings of the committee—and they were made in consultation with organisations including the Australian Stock Exchange, the ASA, the AICD and a number of other bodies—was the need for proper disclosure and transparency. In the view of some, naked short selling was considered to be a poor practice in itself, and the committee found that the government should look closer at abandoning such practices. Generally speaking, the findings of that committee report are very much in agreeance with the circumstances that we find ourselves in today and the actions that the government is taking. So I am very happy to say that not only did we inquire and report but also we have acted to restore confidence in markets.

Schedule 3, the issue of disclosure, is very important. It is as important if not more important than just the simple banning of naked short selling. The requirement for disclosure in covered short sales is exceptionally important. Covered short sales are sales which are supported by securities obtained under a securities lending agreement, so it is the borrowing of securities that is involved. The amendments that we are proposing require sellers of section 1020B products to advise their executing Australian financial services licensee, the broker, when the sale is a covered short sale—a sale which is supported by some sort of a loan or lease arrangement. In turn, the broker must inform the relevant market operator, and brokers must also report the covered short sales on their own behalf to the relevant market operator. That is to ensure that there is accountability as well as transparency and to ensure that those who monitor the market and those who are in the market and invest in the market have some certainty about who is doing what.

This is one of the big issues that came up in the report of the committee. I note that the member for Fadden, who is also a member of that committee, is here. He also contributed to that report, so I am sure he will have some comments about these particular areas. That disclosure requirement is technically very important and has been the subject of calls from a range of organisations and, in following through from the bill we have in front of us today, puts in place some certainty. The disclosure regime will apply to sales made on a licensed market—for example, the Australian Stock Exchange—and sales that occur through on- or off-market crossings regardless of whether the seller is actually here in Australia or overseas. An important point to note is that it is not going to matter where the seller is. It is going to matter which exchange or market they use, whether they be in Australia or outside Australia. It will be an offence if sellers or brokers do not provide those particulars in the sale of section 1020B products at a time and in a manner that is required by the regulators. That is the appropriate action to be taken.

Regulations will set the mechanisms for disclosure, from sellers to brokers and from brokers to market operators, including when and how disclosure occurs. To complement the disclosure regime, brokers must ask whether the sale is a covered short sale before making the sale. That really gives proper disclosure of the highest standard that we require. It is the appropriate standard. This reflects increasing transparency and accountability in a broader range of areas so that better market knowledge exists and ensures that more timely information is provided to all participants involved in those markets.

In summarising, I make a number of remarks. The first is about the global circumstances in which we find ourselves. These are very unusual and unprecedented times. We can go back in history and look at other times when there has been market volatility: the Great Depression, the end of World War I and World War II, and other times when financial markets around the globe faced particular stress. But I think it is fair to say that here and elsewhere we face unique global circumstances. I read just this morning that the United States is pumping $1.2 trillion into their markets to ensure that there is not a financial collapse of the United States economy. This is a phenomenal amount of money on top of the money that has already been put into their own markets. I think the key point about what that demonstrates is that governments have to take strong and decisive action. That is not unusual action in unusual circumstances.

What the Rudd government is doing here in Australia is exactly that: we are taking strategic, measured efforts in a quiet manner; we are not yelling from the rooftops. We are doing the necessary things to ensure people’s confidence in Australia remains, but also so that the confidence of international markets and other jurisdictions in our economy, our banking system and our markets is maintained. It is part of the broader Economic Security Strategy that we have. It is not merely about the $10.4 billion that we are returning to pensioners, families and carers to give them an economic boost in a downturn just before Christmas to help stimulate the economy and ensure that our economy does not stall or falter. It is more than that. It is about the way we have structured the large deposit bank guarantee, and it will evolve. As each day passes, there are new circumstances that we must deal with. What the Treasurer, Treasury, the regulators and this government are doing is making sure that we strategically and in a measured way step through the very complex and difficult global financial circumstances that we find ourselves in.

You can have many different views on how these things might happen, but the courses of action that we have taken to date are absolutely spot on. They are backed not only by the regulators and Treasury but also by the public. The public actually do understand what we are doing. The public are confident that we are ensuring their safety in these very dangerous times. What we are doing is also being supported by industry and different financial sectors. They, like us, understand that in these very complex and difficult financial times you need to take action. You cannot have a different policy every single day. You cannot change your mind three times a day. You have to not only give the perception of being stable, steady, measured and strategic; you also have to do that through your actions. That is exactly what we have done. I am very confident that we have done everything to date that is necessary. There will be more for us to do. This is only the beginning of a number of strategies and policy and regulatory changes that we may need in the future. The actions that we have taken to date not only give people confidence, security and stability here in Australia, where ordinary families can be certain that their government is looking after their interests—that they are safe—but international markets and other jurisdictions will also understand that they can have confidence in our markets because we have a stable government, with good governance and financial systems in place. I commend the bill to the House. (Time expired)