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Wednesday, 26 November 2008
Page: 11560


Ms SAFFIN (5:58 PM) —The Corporations Amendment (Short Selling) Bill 2008 is necessary for a number of reasons. Short selling has a higher risk of settlement failure and these types of transactions have the power to distort—and do distort—the operation of the market by increasing volatility. They also facilitate market manipulation, a scenario that has arisen given that we now have a global financial crisis. It is one that we have to mitigate. This bill does just that.

It is not as if it is a new situation, though, as this bill is filling a gap in the Corporations Law identified in and present since 2001—seven years ago. But it has taken Labor to come to government and the Rudd Labor government to take the action to fill that gap. It was necessary in 2001, 2002, 2003, 2004, 2005, 2006 and 2007, but it is even more necessary and pressing now. I do not know why the previous government failed to take action in this area, particularly when it was a government that liked to tell us that it understood the market, financial issues, the economy and the world of finance. I submit that, if it did, a lot more would have been done in this area and in a range of other areas.

I might have strayed a little from the direct purpose of the bill, but it is necessary to identify why the Rudd Labor government is having to take this action and mop up after those years in this way. The reason for our move to prohibit short selling is self-evident, but it will do the following. It will enhance the integrity of Australia’s markets and complement action already taken to strengthen our financial system through the national regulation of credit and financial services and forthcoming action on credit rating and research houses. It will dampen the volatility. It will bring some certainty—as much as it can—to a market area that does carry risks. The nature of investment has some risk at its core. You can never legislate risk out entirely, so there has to be a balance between the right type and quantum of regulations and allowing the investors and the market to function. I suggest that this bill is on the mark in that regard. It gets the balance right. The lack of any clear legal framework and system-wide disclosure of covered short selling has created this uncertainty or added to it. It is of a type that is not healthy and it has damaged market confidence, not strengthened it, hence the urgent necessity to get the bill through now.

I have heard in the debate some people speaking along the lines of, ‘The regulations are yet to be filled in, particularly by ASIC.’ If you look at the way the taxation system works, there are a lot of things that get what I would call not ‘filled in’ but ‘filled out’. That is the way it works and that is the way this will work as well. Some things have to be a developmental process. We cannot envisage every situation and scenario that is going to arise that could be characterised as short selling, and it is absolutely necessary to allow the regulator the scope to oversee it.

The bill contains three key measures and I want to say a little about those. The first is the prohibition of naked short selling. The bill removes the general ability of people to enter into naked short sales under the Corporations Act. But ASIC still has the power to allow naked short sale transactions if it considers them appropriate. It is envisaged that ASIC will use this power to allow some non-speculative naked short selling. That is necessary to ensure the ordinary operation of the Australian financial markets. Short selling is in a sense speculative, and that is one of the things that the legislation and the regulatory framework have to try to come to grips with. It is the speculative nature of the short selling that is a problem and causes the distortion and the volatility.

The second of the three key measures is the disclosure of covered short sales. This bill establishes the legal regime for the reporting of covered short sale transactions to the market. The market practice as we currently know it has developed where most short sale transactions are not reported, and that is an unacceptable situation. It means that the system is not transparent, and if we do not have transparency in the market we end up with mayhem in the market over and above the normal argy-bargy and risks that people are willing to take. These problems, though, are amplified by the current global financial crisis, which adds to the volatility in the market. The amendments will assure the reporting of covered short sales, and that enhances the transparency and integrity of our financial markets.

The third key measure is the clarification of ASIC’s powers. In that area, the Corporations Act grants ASIC the general power to omit, modify or vary certain parts of the Corporations Act through declarations. The bill specifies how this general power applies to short selling—and this is how it should be. This is how it has to work when we are dealing with the market and shares. The amendments make it clear that ASIC has the power to regulate all aspects of short selling, including prohibiting these transactions and imposing or varying requirements on these. These powers will also extend to transactions with the same or substantially similar market effect as short selling. We can envisage some of those situations, but it would be impossible to describe them. We would end up with a law that could be larger than the tax act. Some of those situations will arise and emerge and some of them we do not even know about today. It is appropriate that that power is with ASIC.

The amendments also expressly state that the short selling declarations made by ASIC early this year were within the scope of ASIC’s general power. My brief reading of it—and there is always a debate about whether the regulator has the power or not—suggests to me that it did have the power, but there were doubts raised. If there are doubts raised, then the view is always taken that those doubts have to be put to bed, and this bill does that precisely.

I shall now turn to some other issues arising out of this bill. There was public consultation on a draft bill and that prompted submissions from a wide range of interested parties, from investors and brokers and the regulators. There was a general consensus that supported the disclosure of covered short sales, but with a wide range of views on how to achieve it. There was not universal support—one can never hope for that as some people just want to be left alone, business as usual. But that is a situation that is not possible, not acceptable, not tolerable. Inaction in this case is harmful. We need corrective action. I know some also subscribe to the view that we can leave the market alone. It is called the Gaea principle—somehow the earth will correct itself and in the same way the market will correct itself. But that does not happen. The market builds up. It is an institution in its own right—admittedly, a very unwieldy institution of sorts—and it does require regulation. It does require law and it requires good public policy, and that is what this bill will provide.

Covered short sales represent a small part of the market, but for something that is small it has an inordinate impact on the market in terms of the distortion that it can create. When people talk about it on a percentage basis and say, ‘It may only be a few per cent,’ the impact is exponential. That is why it cannot be allowed to continue the way it is. Also, it was shrouded in what could only be termed secrecy. It is this secrecy that the bill is designed to address.

I also want to say a little about the provision for ASIC to fill out the regulatory framework. I did a straw poll of members in this House on all sides and asked them to explain what they thought short selling was. It was interesting. Yes, I did ask the Minister for Competition Policy and Consumer Affairs as well—that is why he is turning around and smiling. He knows what it is. The responses I got on what short selling is were interesting. I have seen a lot of the argy-bargy across the chamber with people saying: ‘Go on. You say it. You describe it.’ It is an area that a lot of people have not been involved in. I am just making the point that within the market and within this area it can be complex and it can be confusing to some. However, short selling is pretty straightforward and there is a variety of ways of describing it. In essence, short selling is selling something that you do not own and there are whole lot of other flow-on effects and scenarios that arise out of it. But it is the secrecy issue and a lack of transparency that is a real problem.

I would like to talk here about ASIC having the power to, what I call, fill out—not fill in—the regulatory framework. It is not possible to define in forensic detail all scenarios that can be characterised as short selling or covered, in this case, in the same way that all tax liabilities cannot be so defined in that forensic way in an act. That is why—and I am arguing by analogy but it is very apt in this case—the Commissioner of the Australian Taxation Office has a similar power within law. He has all the checks and balances so that the tax liabilities can be filled out in the same way. That is why it is necessary to have this power. I note that opposition members are saying that they object to that. But it just does not make sense because it is vital to have that provision within the act. With those few words, I would like to commend the bill to the House.