The Australian Securities and Investments Commission (ASIC) published a report Monday, which found that the short selling ban it adopted back in 2008 generally met its regulatory objectives, although it did produce some negative side effects.
The ASIC published the results of a review of measures taken at the height of the global financial crisis to temporarily restrict short selling. It followed moves by regulators in the United States, Britain, and Europe, to restrict short selling in late 2008, out of concern about regulatory arbitrage, to maintain an orderly market, and mitigate the risk of market abuse.
The reports finds that these measures broadly met their regulatory objectives by reducing the risks that might have occurred as a result of unrestricted short selling. “By aligning the regulation of short selling in Australia with the approach taken by other regulators, and requiring permitted short sales to be disclosed, the short selling measures reduced the risks that might occur as a result of short selling of Australian financial sector entities or other systemically important entities. The reduction in settlement failure also assisted in maintaining the orderly functioning of Australian financial markets,” the report says.
However, it also finds that the measures may have contributed to some adverse market characteristics, such as reduced liquidity and increased price volatility, including higher bid–ask spreads, lower turnover and encumbered price discovery; and that they imposed increased compliance costs on many firms.
“While these effects would normally run counter to ASIC’s regulatory objectives, the particular, exceptional circumstances prevailing in the market at the time were such that they were justified in order to reduce the risk of greater market disorder,” it says.
Therefore, it concludes that if circumstances arose in the future that might justify a ban, Australian policymakers would likely consider adopting one again. “If a situation arises in the future that involves disorderly markets and action by regulators in other jurisdictions to limit short selling, it is likely that ASIC and the Australian government would again contemplate a ban on short selling to bolster investor confidence and limit the potential for international regulatory arbitrage,” the report says.
“Over the past three years, ASIC together with other regulators and the market have developed a much deeper understanding of short selling and its impact on trading conditions, and any future calls for taking measures similar to those of September 2008 would have the benefit of the lessons learned from the 2008 bans,” said ASIC deputy chairman, Belinda Gibson.