The sustainability of the Australian Securities and Investments Commission’s (ASIC’s) blanket ban on short selling as been brought into question by the impact on the market of large numbers of funds being placed ‘on hold’ by ratings houses.
Leading ratings agency Standard & Poor’s placed 57 funds from 25 managers ‘on hold’ late yesterday, only hours after the Investment and Financial Services Association (IFSA) and the Australian Council of Super Investors sought discussion with ASIC on any changes intended by the regulator beyond the initial 30-day ban.
IFSA deputy chief executive John O’Shaughnessy said the two organisations had identified a range of issues pertaining to market liquidity, potential mandate breaches, efficient price discovery and prudent disclosure.
“We will be liaising with the regulators and the Australian Securities Exchange on the interim measures as we seek clarification and further guidance to issues as they arise,” he said.
In expressing its concern about current circumstances, IFSA pointed to its response in May to an ASX consultation paper on short selling in which it argued for greater transparency with respect to short selling and securities lending.
That same response warned that “prohibiting or limiting short selling has the risk that unintended consequences will reduce the robustness and efficiency of the market, while also failing to address concerns on market manipulation”.
The Australian Institute of Superannuation Trustees (AIST) offered qualified support for the ASIC ban on short selling, reminding the regulator that the practice had a legitimate place in the investment landscape.
“AIST has long called for better disclosure in short selling and we hope this will be one of the positive outcomes of the current ban,” the AIST said.
Commenting on the impact on superannuation funds, the AIST said the ban would affect the management of long/short portfolios and hedge fund trading, but noted that such practices were only a small component of a fully diversified super fund.
“Diversification is one of the strengths of Australian super funds,” it said. “Once the goal of settling the market has been achieved, AIST hopes that ASIC and other international regulators will recognise the legitimate role for short selling in markets.”
