Australia’s corporate regulator has lifted the ban on covered short selling of financial stocks, saying systemic risks in the financial system had declined.
The Australian Securities and Investments Commission (ASIC) lifted the ban on Monday ahead of its Friday expiry date after reviewing market conditions.
“The balance between market efficiency and potential systemic concern has now moved in favour of the ban being lifted,” ASIC said in a statement.
But the global financial crisis and recession continues to place pressure on Australia’s markets and ASIC will reimpose the ban immediately, and without consultation, if it considers market conditions warrant the action, the regulator said.
In particular, ASIC will watch short selling activity by participants, including hedge funds, which could potentially harm Australia’s financial system.
Daily reporting by market participants to the Australian Securities Exchange (ASX) of gross short sales will continue, as will the publication of aggregate short sales the day after trading, ASIC said.
Among global regulators, ASIC has been the laggard, retaining the ban on covered short sales of financial stocks long after its peers dropped similar bans.
The US Securities and Exchange Commission dropped its ban on October 8, 2008 and the UK’s Financial Services Authority dropped its ban on January 16.
Market players were mixed in their assessment of the potential impact of the ban’s removal.
ASIC’s willingness to reinstate the ban if predatory behaviour emerges means it is unlikely hedge funds will recommence this type of behaviour, IG Markets’ research analyst Ben Potter said.
“Overseas, where most major markets have already lifted the bans, the selling has been fairly limited so there is no reason to believe Australia would be any different,” Mr Potter said.
Credit Suisse said there could be an impact on share prices because financial stocks globally have re-rated at a juncture that is quite early in the global recession, creating the risk that perceptions of over-valuation emerge, particularly if equity markets pull back from their recent rally.
However, the ban’s removal may also have little impact because financials have re-capitalised, thereby reducing the bankruptcy risk which often underpins a short-selling strategy, Credit Suisse told clients in a note in May.
At 1102 AEDT shares across Australia’s major financial stocks were all weaker, with Australia’s big four banks losing between 0.06 per cent and 0.62 per cent.
Macquarie Bank, a previous victim of short selling, lost $1.15 or 3.43 per cent to $$32.34.