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Wednesday, 26 November 2008
Page: 11558


Mr SULLIVAN (5:47 PM) —I am pleased to rise today to support the Corporations Amendment (Short Selling) Bill 2008. This bill has very simple objectives—that is, to enhance market confidence in a time of significant market volatility. I think that we are all aware of what is going on around the world today, despite the fact that just a short while ago members opposite believed either that it had been caused by the election in Australia in November 2007 or that it was in fact a furphy. This bill does three things, which have been canvassed reasonably widely, but I wish to visit them again. Firstly, it bans naked short selling. Secondly, it requires full disclosure in relation to covered short selling. Thirdly, it clarifies ASIC’s powers under the Corporations Act 2001. The member for North Sydney was a bit concerned whether we knew what short selling was when he came into the House before question time today, so I thought that I would tell him briefly that I do understand what short selling is. Short selling is the practice of selling shares that the seller does not own, then buying the shares back to complete the original transaction. Covered short selling is selling of borrowed shares—the sense of which escapes me somewhat. Naked short selling is selling shares that do not exist.

In 2005, Patrick Byrne raised the alarm in the US about naked short selling. He was ridiculed for his views and pilloried widely within the financial community. I note also that Warren Buffett was widely reported, but also disregarded, when he raised concerns in the early part of this century about derivatives, arguing that such highly complex financial instruments were time bombs and ‘financial weapons of mass destruction’ that could harm not only their buyers and sellers but the whole economic system. History has shown who was right in that case and also in the warnings that Patrick Byrne was making in 2005. Naked short selling has been blamed by some as a contributor to the global financial crisis, just as many hold that short selling tactics are a major cause of all market downturns—for example, the 1987 crash. Others will be much better placed than me to make judgements regarding the degree to which those views hold true.

Schedule 2 of the bill effectively bans the practice of naked short selling in Australia. Naked short sales have a high risk of failure—that is, when settlement is due, the seller does not have the shares to transfer. ASIC can, if it sees fit, allow some naked short selling. It is assumed that this power will be used only when such sales are necessary to ensure the ordinary operation of financial markets. There is plenty of support for the practice of short selling. The website Investopedia, for example, expresses this view:

… short selling makes an important contribution to the market. It provides liquidity, drives down overpriced securities, and generally increases the efficiency of the markets. Short sellers are often the first line of defense against financial fraud.

It goes on to say:

… work from short sellers is often regarded as being some of the most detailed and highest quality research in the market. Its been said that short sellers actually prevent crashes because they provide a voice of reason during raging bull markets.

That is high praise indeed. The Reserve Bank in Australia considers that both short selling and the associated securities lending add to market liquidity and pricing efficiency.

The Parliamentary Joint Committee on Corporations and Financial Services in its June 2008 report Better shareholders, better company: shareholder engagement and participation in Australia remarked upon the existence of a ‘widespread view that short selling activities are not subject to sufficiently rigorous disclosure requirements to ensure shareholders remain adequately informed’. All members of parliament and all members of society—except those with an ulterior motive—would want to see that people participating in our markets are adequately informed. Consultation during the drafting of this bill saw the government receive submissions from a wide range of stakeholders. Investors, brokers, ASIC and the ASX all made submissions. That wide range of stakeholders broadly supported disclosure of covered short sales, but offered different views as to how this could be best achieved.

Short selling, it seems, is here to stay, though, as I said before, I personally struggle with the concept of selling shares you do not own to people who are buying them with money they do not have. We saw a large number of such investors suffer quite savagely when margin calls were made earlier this year as the stock market headed south.

In reading some material for this debate I came across an unattributed quotation. I cannot tell you who uttered this wisdom, but it is wise. It was: ‘You can never control the market; you can only help it reach the best conclusion by providing as much information as possible.’ The provisions in this bill that go to providing that information are found in schedule 3. It is that schedule that the opposition indicated earlier today that they will be opposing. The shadow minister for financial services, superannuation and corporate law, the member for Aston, made that clear during his contribution.

To be fair, he did also say that he offered the government the opportunity to redraft these provisions through his amendment. The question is, of course, what is it about the disclosure of covered short sales that has the opposition so spooked that they would try, as they did in the other place, to delay the passage of this bill; so spooked that, when my colleague, the member for Leichhardt, sought to canvass the matter, he was continually interrupted by fallacious points of order taken by the member for Calare?

These are good provisions. Transparency in the market is particularly important at this time, and the sooner this bill passes through this place the sooner Treasury can consult the industry about the details of the regulations. Delaying, or watering down, these provisions is not in the interests of this nation at this time. It may be in the interest of sections of the community with whom members opposite curry favour; I simply do not know. But I do know that the approach taken by the opposition does them no credit in the context of Australia’s response to every nuance of the global financial crisis.

Schedule 1 of the bill contains the provisions dealing with ASIC’s powers. These go firstly to clarifying ASIC’s powers to regulate short selling. ASIC’s powers as set out in the Corporations Act 2001 are more than likely adequate to allow ASIC to undertake this action. However, these changes make it clear—crystal clear—that the power does exist. Similarly, this bill validates the actions that ASIC has taken so far in relation to short selling. Again, this makes it clear that the power exercised was a power anticipated by the provisions of the Corporations Act 2001. Taken together, these are sensible measures. The absence from the 2001 legislation of explicit power does not mean that the power does not exist. The rules applied in statutory interpretation would more likely than not confirm that. However, these are times when certainty on regulatory matters is vital and therefore it is prudent to include quite explicit provisions in the principal act.

I want to spend a moment in considering those actions taken by ASIC in relation to short selling in the market. On 21 September, ASIC put a 30-day ban on the covered short selling of securities, a ban that they extended on 21 October as a consequence of the market conditions that existed at that time. On 13 November, they announced that that ban would be lifted except in relation to the 46 securities that make up the S&P and ASX 200 financials index, plus five other securities. At the same time, they indicated that the ban on covered short sales of those 51 securities would remain in place until 27 January 2009. The ban on naked short selling, as indicated by ASIC, is to remain in place indefinitely.

The announcement of 13 November also included a reporting and disclosure procedure, which market participants are following. Interestingly, the daily gross short sales report for 24 November shows that 27 of the financial securities on the S&P ASX 200 financials plus five list were short traded on that day. Clearly, that shows that ASIC is working with market participants to ensure what we require: the orderly operation of the market.

Australia’s strong position in the context of the global financial crisis is due in no small part to the financial regulators. As one of those regulators, ASIC is delivering for the market and the people of Australia the certainty that is required at this time of volatility. This is a very good bill. The measures in this bill are important. They make improvements to the market architecture. They are deserving of the support of all members in this House. They have my support. I commend them to the House.