Wednesday, 26 November 2008
Corporations Amendment (Short Selling) Bill 2008
Debate resumed from 13 November, on motion by Mr Bowen:
That this bill be now read a second time.
I rise this morning to make some remarks on the Corporations Amendment (Short Selling) Bill 2008. The bill introduced by the government which is currently before the House represents some positive outcomes but also, regrettably, some dangerously negative outcomes. We in the opposition strongly support an appropriate disclosure regime and the resultant enhanced market integrity that goes with that. We support measures that enhance greater disclosure and transparency. The strength and the integrity of the Australian financial markets are of course of great importance not only to so-called ‘mum and dad’ investors but also to institutional investors and superannuation funds, to mention a few. It is of the utmost importance that disclosure that provides the basis for a strong and honest marketplace exists in this country. However, we will not support ambiguity and uncertainty, nor will we support a circumvention of proper parliamentary process.
Whilst supporting schedules 1 and 2—to which I will return shortly—the opposition will move to amend the bill to remove schedule 3. I will move this amendment during the consideration in detail stage of the debate. Schedule 3 is an empty vessel which vainly attempts to provide a legislative base for the disclosure of covered short sales. The matter at stake goes beyond the adequate regulation of the market. At the heart of this schedule is the principle of sound governance. This principle will be done great harm by the Rudd government’s poorly conceived and grossly inadequate attempt at legislation in schedule 3. It has become absolutely clear through our discussions with industry and other stakeholders, together with the evidence presented at the recent inquiry of the Senate Standing Committee on Economics, that there is enormous concern with the way in which this particular schedule has been constructed—that is, its immense lack of detail, clarity and substance. Make no mistake: schedule 3 is a dangerously lazy outline which threatens the very certainty and strength which our market relies heavily upon. After holding an extensive process of consultation, all the government has presented to the parliament is this inept schedule which will create more instability and uncertainty than the current status quo. The opposition wants the government to do the work that needs to be done and then come back to the parliament with a schedule in a new bill which has the detail and certainty required within it.
The opposition is in agreement with the government over the actions represented by schedules 1 and 2. Schedule 1 clarifies ASIC’s power in relation to short selling. ASIC is given the authority to regulate all aspects of short selling. Any confusion over which entity has regulatory oversight for short selling would be removed. We support this measure. Schedule 2 bans so-called naked short selling, which becomes the default position. I note that ASIC is left with a regulatory carve-out to allow naked short selling where it sees fit. It is my understanding that naked short selling represents less than two per cent of all short sales conducted in Australia. It therefore clarifies and provides certainty to the broader marketplace. These first two schedules are clearly positive measures. ASIC and the ASX have already been able to ban and regulate short selling through issued orders. They nonetheless deserve our support for the purposes of clarity.
I will now come to the reasons why the opposition intends to move an amendment to omit schedule 3 from the bill, the most important of which is that we want to ensure the marketplace has certainty and stability, something that this skeleton or, if you like, the bare bones schedule in the bill does not provide. One of the most ridiculous claims asserted by the government on this schedule is that it is a matter of urgency that this bill be quickly passed. ASIC and the ASX are able to continue regulating short selling indefinitely; moreover, schedule 3 of this bill does not come into operation until regulations are tabled in the parliament. The government itself has said that the regulations are yet to be drafted and yet to be consulted upon and will only appear some time in the future, most probably months away. Considering that the Treasury has indicated that it needs more time to consider the nature and the structure of regulation, there is absolutely no justification for running the media line and the media spin that this schedule in the bill should be rushed. Undue haste without proper attention to detail and substance, as the member for Maribyrnong would know, is not good law making and, frankly, is quite dangerous in this context—and he would know that as well.
The government has invented a deadline to appear to be doing something. Just because you say you are doing something does not mean that you are actually doing what is right or indeed what is good. Being decisive demands taking a decision to present a properly detailed bill for the parliament’s consideration. This should not be an unattainable goal, considering that the government have just conducted what they say has been an extensive consultation process. The most important aspect of this schedule is the procedure for the disclosure of covered short sales. Schedule 3 has a complete lack of detail in relation to how the disclosure requirements would actually work in practice. This means that the key issues and concerns for the industry stakeholders remain undetermined and unresolved. There are no legislative provisions on how disclosure should operate in terms of time, regularity and stock measure to be used. Most troubling is that there is neither framework nor principle espoused; therefore, there is no indication of how any regulation is to be approached. The lack of certainty is most concerning. The very point of having a parliament is that matters of national importance can be considered and debated in this place. The parliamentary legislative process provides the opportunity for interested stakeholders to scrutinise the proposed measures.
In relation to schedule 3, there is a complete lack of transparency which arises from the circumvention of the parliament. As the bill currently stands, there is no capacity for scrutiny and consultation in relation to schedule 3. If it were passed in the government’s proposed form, the government would be able to continue ignoring consultation with industry stakeholders and could simply table binding regulations in parliament, regardless of the consequences. Once again, parliamentary democracy suffers under the Rudd government. The government’s contempt for this place is unprecedented—
Government members interjecting—
and I am pleased to hear that the members opposite agree.
There is also the government’s exposure draft, which was released in September during the now forgotten consultation period. Key industry groups, including the Investment and Financial Services Association, the Australian Financial Markets Association and the Securities and Derivatives Industry Association, do not agree with the government’s preferred option 2 in the exposure draft. There is significant opposition to the disclosure of covered short sales to other brokers as proposed in option 2. Industry advocates that positions should be disclosed to the ASX, as market operator, and not to other brokers, so as to protect commercial advantages and prevent price distortion. Key industry participants support the implementation of a permanent disclosure regime where the market participants—investors and fund managers—report their short sale positions directly to the market operator, the ASX, on a company-by-company basis. The information would then be published by the ASX on that basis. Once again, this position is contrary to the government’s selected option 2 in the exposure draft.
Industry largely has a preference for disclosure of positions to occur one to two weeks after the short sale, not on the following day as proposed by the government’s favoured option 2 in the exposure draft. Industry concerns include the proliferation of ‘copy-cat’ style behaviour, where speculators would derive great benefit from the publication of daily short-selling data. In addition, a next-day disclosure regime may expose commercially sensitive and active investment research to other participants, which could further distort the market. It has also been strongly argued to us that an exemption threshold for small traders should exist within the legislation. This would reduce unnecessary costs for small market participants. I also note that there are no legislative provisions for stock lending, despite stock lending being heavily featured in the now forgotten exposure draft.
Not only does industry have issue with schedule 3 but Treasury officials stated during the Senate Standing Committee on Economics hearing the other day that it was not ideal that the particulars on how the disclosure regime would actually operate are not invested in the main legislation. The Australian Financial Markets Association were one of the few industry groups—indeed, one of only two—that were allowed, that were actually given permission, to present to the Senate Standing Committee on Economics. This is despite many requests to appear before the committee. AFMA strongly asserted that the type of information that would be required for disclosure should be in the legislation, not left to regulation.
The committee also heard from the Investment and Financial Services Association, who stated that regulation should exist only to fill in the detail and that the law itself should have the basic requirements within. IFSA held that such basic requirements must exist in order to provide direction and guidance to the detail. And I am sorry that the member for Denison is getting a headache, but he will have some empathy with the industry and the financial markets, because this bill will give them a headache.
Most damning, IFSA went on to state on the public record that the disclosure regime is the very structure which must be in the legislation for certainty’s sake. This issue of no detail being in the schedule is particularly highlighted when one refers to the government’s own explanatory memorandum. In the explanatory memorandum it says:
The amount of the compliance cost impact will be determined by the details to be prescribed through Regulations. As such, it is not possible to quantify the costs until the Regulations are made.
So there you have it for all to see: this government, because it has not done the work required, is admitting openly that it has no idea of the cost implications because it has no idea what it wants to do in terms of the important—indeed, the incredibly important—implementation and practical details of this requirement.
One does have to ask the question: why has the government decided to present only a skeleton schedule, devoid of detail and substance, after it has had so much time to do the work and to get it right upfront in the legislation? Why would the government not want to detail the implementation requirements and details in the main legislation, thereby providing absolute certainty and clarity to the market? Clearly, the answers to these questions are because the government does not know what it wants to do, it has not done the work required and it simply just wants to say that it has done something for the sake of having said it has done something.
The participants in the market in this country want certainty. They do not want requirements to change at the whim of a government long on rhetoric but short on substance. If schedule 3 as it currently stands is not omitted, it will only cause instability in the marketplace, and I am sure the member for Maribyrnong does not want to create instability in the marketplace. The market needs certainty, not ambiguity. It would be negligent of any opposition to not highlight and draw attention to such an inept schedule. Again, the opposition wants the government to do the work that needs to be done to provide certainty and substance to the market and then present it to the parliament for consideration. Our amendment will allow the government to achieve the aims of schedules 1 and 2 as our amendment, if passed, will allow schedules 1 and 2 to become the bill. Our amendment also provides the government with yet another opportunity to get schedule 3 right, an opportunity to actually work out what it wants to do and to articulate this upfront in the main legislation and to represent it to the parliament for consideration.
I thank the shadow minister for the offer of his notes but, as I did not agree with anything he said, his notes would hardly enhance my case. Global financial markets have experienced substantial difficulties in recent times. Every country has been touched by the tough economic conditions at the moment. Although we are better placed than many other countries in the world, we are not immune to this crisis. We are suffering its impacts now and will be mauled by its impacts long into the future. So the challenges ahead remain great and there are many tests that lie before us.
The Rudd government is taking decisive and early action to protect the interests of Australian working families. Globally banks have failed or been bailed out, the latest being the largest bank in the world—Citibank—and there are countries in recession. There are no easy solutions or quick fixes to this global financial crisis. This will be a long, drawn-out crisis which will have a real impact on Australia. For the world to drag itself out of the crisis requires strong action by governments and a lift in business and individual confidence. It is to be hoped that the recent election of Barack Obama as US President will assist, as well as the actions taken in recent days by the Chinese government and past and future decisions by the G20, at whose meetings Prime Minister Rudd has been present.
The Rudd government has injected $10.4 billion—
Mr Deputy Speaker, I rise on a point of order under standing order 76. I know that when members begin their speeches they are usually given the chance to make some general introductory remarks but this is a bill about short selling and the member should be required to come back to it.
The Rudd government has injected $10.4 billion as part of the Economic Security Strategy to stimulate economic activity and protect vulnerable groups in our society, especially pensioners, carers, people with disabilities and low-income families. This strategy builds on the decision already taken by the government to guarantee the bank deposits of all Australians. It shows true leadership by the Rudd government.
As defined by the ABS, covered short selling refers to the practice of short selling securities one does not have—to settle the trade, securities need to be purchased or borrowed. There is a general concern that short selling drives down equity values. A variety of independent studies have been published on this and the consistent conclusion is that short sellers tend to be contrarian in nature. Generally studies have demonstrated that as equity prices fall short-selling activity increases. Regulators globally continue to regard short selling as a legitimate investment technique that contributes to price efficiency and liquidity.
Short selling can protect investors from purchasing overpriced assets. However, it is fair to say that short selling has become synonymous with hedge funds and the loss of money by financial interests. Some of this criticism is exaggerated. Short selling is part of the system. Short selling can enhance market competition by allowing the pricing process to fully benefit from the insights of investors, with negative as well as positive opinions. Short selling is often used to support the following strategies: arbitrage trading, such as yield enhancement, dividend reinvestment plans, convertibles, pair trading and relative value; directional play; active extension strategies, such as 130/30 long-short mandates; merger and acquisition activity; support for derivative products, such as futures and options; and index rebalancing.
The Corporations Amendment (Short Selling) Bill 2008 contains three key measures: (1) it clarifies the ability of ASIC to regulate short selling and puts beyond doubt the validity of ASIC’s recent class orders in relation to short selling; (2) it bans naked short selling—ASIC has the power to grant exemptions from this ban; and (3) it establishes a disclosure regime for covered short-sale transactions—that is, short sales supported by securities lending arrangements.
This bill is urgent as a means of enhancing market confidence during a period of significant international market volatility. The amendments will provide certainty to the market regarding the scope of ASIC’s powers to regulate short selling. That makes the opposition’s reckless but failed attempt yesterday in the Senate to delay the passage of critical legislation a disgraceful event. The opposition’s political play on this bill was revealed yesterday when they asked a series of questions during a hearing of the Senate Standing Committee on Economics under the pretence of genuinely seeking to form a view on the bill. But an overzealous opposition senator got ahead of himself and hours before the evidence was even complete lodged a notice of motion to delay the bill—ah, the benefits of telepathy!
As the Minister for Superannuation and Corporate Law said yesterday:
At a time when the global financial crisis is hitting real people hard, such as through their superannuation accounts, this measure will deliver the certainty that is required …
The Corporations Act grants ASIC the general power to omit, modify or vary certain parts of the Corporations Act through declarations. These amendments will specify how this general power applies to short selling. 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 transactions. These powers will extend to transactions with the same or a substantially similar market effect as short selling.
The amendments also expressly state that the short-selling declarations made by ASIC earlier this year were within the scope of ASIC’s general power. These declarations had the effect of prohibiting covered short sales on Australian financial markets subject to some exemptions. They also introduced a disclosure regime for covered short sale transactions taking place under exemptions to the prohibition. ASIC’s actions were necessary in light of the high levels of volatility being experienced in Australian and global financial markets, and international regulatory developments occurring at the time. These amendments are for the avoidance of doubt. They provide both ASIC and industry with certainty over the scope of ASIC’s powers in relation to short selling. This is necessary to ensure the effective regulation of short selling in Australia.
The bill also amends the Corporations Act to prohibit naked short sale transactions. A naked short sale is a transaction where the seller does not have a presently exercisable and unconditional right to vest the product in the seller at the time of sale. Various concerns have been expressed in relation to naked short selling. Transactions of this nature may have a higher risk of settlement failure because the seller does not have the capacity to vest the products at the time of sale. They may also distort the operation of financial markets by causing increased price volatility and potentially facilitating market manipulation. In addition, the perceived activity of naked short sellers may damage market confidence, particularly among retail investors.
For these reasons, it was considered appropriate to remove the general ability for people to enter into naked short sales under the Corporations Act. However, ASIC 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. This is necessary to ensure the continued ordinary operation of Australian financial markets. It is appropriate that ASIC manage these exemptions, given the dynamics of the market and the rapid changes in the conduct and structure of financial markets.
Finally, the bill establishes a disclosure regime for covered short sales. Covered short sales are sales supported by securities obtained under a legally binding securities lending agreement. Under the proposed disclosure regime, a seller will be required to disclose covered short sales to their broker. The broker will in turn be required to disclose this information to the market operator. Brokers trading on their own behalf will be required to disclose covered short sales directly to the market operator. The market operator will be obligated to publicly release details relating to this information. It will be an offence for a seller or broker to not disclose details of a covered short sale. Regulations will set out the timing and manner of the disclosures. Market practice had developed whereby most covered short sale transactions were not reported. This has created significant uncertainty relating to the activity of covered short sellers in Australian securities, which is damaging investor confidence in financial markets. These problems are obviously amplified by the current market volatility.
The legislation aims to provide certainty to markets beyond the expiry of parts of a temporary ban on all short selling imposed in September. The Australian Securities and Investments Commission imposed the ban after similar crackdowns in the United States and some European markets, as regulators acted to defend troubled financial services sectors. I agree with the words of the Minister for Superannuation and Corporate Law, who has said:
… in the current global financial crisis, there has been a need to take decisive action, particularly where we’ve seen some trading practices that involve manipulation or abuses.
I accept that the current opposition, as evidenced in The Howard Years, has a chronic inability to ever support each other, especially in defeat.
In fact, the member for Sturt may be interested to know that the Minister for Superannuation and Corporate Law has also said:
The Bill fills a gap in law, present since 2001. It will boost transparency, enhance the integrity of Australia’s markets and complement action already taken to strengthen our financial system …
There is criticism about this bill at the edges. Certainly, people who have lost money or people who are experiencing financial hardship at the moment are finding the whole operation of the market difficult to contemplate. Of course, though, we need to recognise in this legislation that short selling is not automatically bad. For instance, if BHP shares were at $20 and I were to propose shorting stock at $10, someone else at the other end of the transaction who did not think that the stock was worth more than $10 would see this as a fantastic transaction. That is the market at work. Short selling does allow liquidity in the system, but our legislation, I think, captures what is important: the market operates best when there is transparency. I think that all a regulator can do is make the transactions in the market obvious and then allow people to choose. This legislation enhances transparency in the operations of the market.
The Rudd government has been quick to act to help Australia minimise the impacts of the global financial crisis. It has been responsible, it has been equitable and it has been fair—showing all the hallmarks of true Labor values—in the best interests of the Australian people. In times of greatest hardship, the Australian people have always put their trust in Labor to deliver, and the Rudd government intends to deliver for all Australians. I commend this bill to the House.
Sometimes some of the economic terminology that is used in this place is not well understood by everyone present. I am sure it is by most but possibly not by all. I strongly suspect that, with regard to this Corporations Amendment (Short Selling) Bill 2008, such a lack of understanding would be quite common. It is not something that everyone wants to tackle, but I welcome the opportunity to speak on this legislation today.
I will begin with an explanation of what it is all about. It starts with selling long, or buying shares at one price, with the expectation that they will go up in price and then you can sell them at a profit. Short selling is the expectation that a stock will fall in price. But where it gets different is when the stock is sold before the seller actually owns the stock. Thinking the price will fall, the short seller sells the stock with something like a three-day settlement date, at which point the handover of the stock occurs. In this way the seller does not actually need to have the stock for three days, giving the stock time to fall and a profit to be made, as well as time for the stock to be acquired and handed over.
There are two types of short selling, one type being naked or uncovered short selling and the other being covered short selling. Naked short selling is where the seller makes the sale transaction without an existing arrangement being in place to acquire the stock for the subsequent handover to the buyer. Often a naked short seller wants a three-day settlement for his sale but a same-day settlement for his buy. Covered short selling obviously still does not require the ownership of the stock that has been sold, but it has to have an arrangement already in place whereby the seller has access to the same type of stock. Such an arrangement normally involves a lender of stock, who will lend the short seller the stock so that the settlement can be made. The short seller then acquires replacement stock to give back to the lender. Covered short selling therefore ensures that stock will be available to be settled on the settlement day.
That brings me to the reason why short selling has attracted quite a bit of interest. It is because investors do not have confidence in the efficiency and the fairness of the market in spite of the fact that regulations regarding short selling are more stringent here than in other nations. Clearly, in the current environment greater transparency is desired with regard to short selling. Investors, and in fact the whole sector, require confidence in the integrity of their markets, otherwise prices, investment, risk management and, as we have seen, the provision of capital finance, will all be at risk.
Yet if we consider why short selling is such a risk, it is because, if there is a strong interest in short selling and that becomes known, there can be a lack of confidence in the company as other traders become panicked about price falls. There are scenarios where such a lack of confidence can be created by manipulation or abuse, even abuse of information, rather than access to a transparent set of figures. Yet transparency requires the collection of market data beginning, firstly, with the identification of that data. It is always wise to learn from the current rules within Australia and the overseas experience regarding short selling to, in effect, provide a stark point for a future direction.
With regard to transparency, this does raise a very interesting point. The commentary on this bill states that disclosure of covered short selling will indicate that some stocks may be overvalued and it will effectively give confidence to the investors, the buyers, to buy in the market as they will not be uncertain about what is behind the short selling, and of course market abuse can then be reduced.
I might also note that business commentator Terry McCrann in the Herald Sun on 21 November this year described covered short selling as not actually being short selling. He said that, effectively, the borrowing of shares involves the transfer of the full legal title to the seller. The seller then in fact becomes the owner of the shares, which until the tax act was changed in 1989 would have represented a realisation. Mr McCrann suggested that covered short selling would stop if the tax act was changed and tax made payable on the loaned shares, which seems to be an interesting point.
I will speak about the exposure draft and industry perspectives. However, before I do that I just want to go through the coalition’s position on the bill. With regard to schedule 1—again, as I am sure others have said—we support the implementation of schedule 1 as a measure to enhance market transparency by providing certainty to both ASIC and industry regarding the scope of ASIC’s powers. With regard to schedule 2, again we support its implementation because we believe financial transactions like naked short selling can distort the operation of financial markets by causing increased price volatility. As I have previously said, it is right that naked short selling can facilitate a market manipulation and can damage confidence even though naked short selling is estimated to represent less than two per cent of all short sales.
The coalition does not support schedule 3, because as you look through the text of the bill the amendments are not much more than a straw man of ‘ifs’ and ‘mays’ with regard to yet-to-be-announced or possibly not-yet-thought-of regulations, a straw man waiting to be filled out with regulations at the future whim of this government seeking to bypass the scrutiny of the parliament. I ask the question: why, after such consultation as stated by the government, are there no details for this schedule? I do not see how the cause of stability is furthered by this schedule which purports to deal with the disclosure of covered short selling.
I would next like to turn my attention to the government’s exposure draft and the options put forward for dealing with short selling, and I will speak on these in detail. Option 1—retaining the status quo or taking no regulatory action—involves retaining the current regulatory arrangements and encouraging voluntary disclosure of covered short sales. This means no additional regulatory costs for businesses but also no change in the level of uncertainty in the market caused by covered short-selling activity. Clearly, investors would see no reason to disclose information to the market and the government would have no additional means to make it happen.
As for option 2, the one the government wants—disclosure of covered short sales to brokers—the commentary on the exposure draft states that this option places an obligation on investors to disclose covered short sale transactions to their broker. The broker must then report on to the market operator. It is here that we on this side begin to have a divergence from the government. A general disclosure obligation and penalties are fine in the Corporations Act, but what we have in the bill are airy-fairy references to regulations which are not yet available. Yes, there is technical detail involved, but this is too loose for my liking and that is why we oppose schedule 3. It is also noteworthy that in the commentary mention is made of the need to specify the technical aspects of the disclosure requirement in regulations so as to provide sufficient flexibility so the requirements can be amended to take account of any changes in market activity in the future. That is quite right, but let us have those regulations and a schedule that accurately reflects the detail.
Option 3 is described as the direct disclosure of covered short sales to the market operator. This option requires a clear and direct obligation on investors to disclose covered short sale transactions to the market operator. As discussed before under option 2, this requirement would be implemented through the Corporations Act, and schedule 3 and lack of regulations equally undermine this option. What can be said for this option is that it would be cheaper in terms of regulatory costs than option 2—cheaper for investors but a significant problem for the market operator who would endure the significant regulatory burden. Investors would nevertheless be required to make significant changes to their processes and their systems to allow the reporting of this information directly to the operator. These would be in addition to the costs for investors identified under option 2 in relation to determining their exposure on particular securities. Investors would have the benefit of confidentiality as the brokers would not see the individual trades. It is, however, expected that the overall costs incurred by investors and the market operator under option 3 would in fact be greater than the costs incurred by brokers under option 2.
With regard to option 4, which is the disclosure of stock-lending transactions, this involves the obligatory disclosure of all stock-lending transactions because it would equate directly to the level of covered short-selling activity in a particular security. Similar to options 2 and 3, this option could be implemented through the Corporations Act supported by supplementary regulations and therefore suffer from the limitations we have already identified. It is worth noting that some stakeholders have questioned whether stock-lending data will provide a sufficient indication of short-selling activity—and I will go on with that later. Under those circumstances the disclosure of stock lending alone is therefore of limited value.
Finally, option 5 is a review of the existing short-selling regime—which I would have thought the government would have been attracted to given the word ‘review’ is involved. As the commentary says, this option involves a wholesale review of the regulatory framework governing all short-selling transactions. This review would cover the existing rules relating to short sales in the Corporations Act. Given the submissions taken by the government on this bill and short selling in general, this should pretty much have been achieved or at least the relevant information should have been made available already. It is obvious that option 2 has been adopted by the government. This option places an obligation on investors to disclose covered short sale transactions to their brokers. The broker will then be responsible for reporting this information to the relevant entity, the market operator.
Of course, those in the markets have another view and that is worth listening to. I am aware that AFMA, the Australian Financial Markets Association, offered two of their own proposals. Proposal A involves disclosure of all short sale positions, or a direct method. They acknowledge that one of the greatest challenges in collecting functional data on short selling is the task of producing consistent data from all market participants on their short-selling activities. AFMA is of the belief that the only way to overcome this is to collect information directly from entities that hold short sale positions. This would involve fund managers, who could report though custodians and retail clients through their Clearing House Electronic Subregister System, or CHESS, sponsors. I am informed that brokers currently report their own short sale positions to the stock exchange on a daily basis but that they do not have the information necessary to report their client positions. Similarly, it is very hard to imagine some clients wanting that information provided. However, fund managers have signalled their willingness to disclose to the market regulator on a bimonthly basis their aggregate short-selling positions on a stock-by-stock basis. I have made mention of this in a previous speech.
This overcomes the main problem identified in the commentary in relation to option 3. Many in the markets support such a proposal, as it would produce the most meaningful and reliable aggregate data on short sale positions in individual stocks. It represents data that the market would find valuable and useful. The advantage is that it would be easier for a wide range of investors to interpret. It would also provide listed companies with a clear and very interesting insight into the build-up of short sale positions in their stock. This is not possible to achieve by using just transaction data. But a public release of information in such a manner reduces the risk of increased price pressure or volatility and preserves confidentiality of strategic trading positions. It is also agreed that disclosure of substantial positions—of five per cent of the underlying stock—is relevant to the policy objectives. I would certainly advocate for the need for entities to register with the Australian stock exchange or ASIC as an entity eligible to short sell in the Australian market, requiring effective compliance.
I should say that AFMA makes the point that the UK Financial Services Authority now requires short sellers to disclose net short positions of more than 0.25 per cent in financial stocks. The US Securities and Exchange Commission also moved recently to require disclosure by institutional investors of the number and value of each stock sold. It is correct for investors to focus primarily on the fundamentals of companies when making investment decisions, rather than on the level of shorts in the market. I think we can all agree on that. However, if this is relevant to the assessment of the underlying value then information on the level of short sale positions rather than the transactions is in fact the easiest information to interpret.
What I have described is one AFMA proposal, yet they also have an alternative—an indirect method—which involves disclosure by the Australian stock exchange of transactions that are the subject of borrowing arrangements in the market. It is suggested that securities that are lent could be the subject of coding in CHESS so that a percentage of borrowed stock can be identified as part of the total stock. They believe that this is a very good method of getting the data for onshore and offshore stock borrowings.
It would appear that the markets believe that both the above proposals are superior to the direct disclosure of covered short sales to brokers, as proposed in option 2 of the commentary. A key concern in this regard is the low value that traders attach to the information that would be collected under option 2. Transactional data is not as relevant as position data, as no observer of individual transactions can make a judgement as to the size of the open short positions in the market. There are also a variety of practical and operational problems encountered in complying with a real time tagging regime, which give rise to significant concerns about the consistency and reliability of the data in terms of the objectives of transparency. Option 2 data would not capture intraday closeouts, would be volatile over time and would not cover the purpose of short sales reported. Data quality would be reliant on clients reporting all of their short sales to their broker. Traders may not be able to advise if a particular sale is a covered short sale at the time of the order placement because they would have incomplete knowledge of the entity’s total position or how sales are intended to be settled. For instance, some traders rely on daily stock availability sheets provided by their equity finance desks to support their trading activities. The trader may not know whether the stock availability is sourced from existing inventory, borrowed stock or stock lent that can be recalled et cetera. This may lead to overreporting in some instances.
Further, when aggregating several orders together, some of which may be short and some of which may not be, tagging the order will not give accurate information to the market on the level of short selling. In addition, members have noted the need to balance transparency against possible market liquidity impacts, especially the willingness of traders and market makers to offer liquidity under these conditions, when assessing the benefit from the real time tagging of orders. There is a risk of greater market volatility. Another key concern of AFMA and the markets is that option 2 would require significant systems changes and would therefore be expensive to implement. They give an example. Direct market access systems would have to be reconfigured to capture covered short sale trades, as clients are prohibited from naked short selling but trading pursuant to a borrowing agreement may be permitted. I certainly appreciate the information I have acquired from AFMA to inform my comments today.
I will close by speaking of the problem we have with this bill—schedule 3. The third schedule is about trying to provide a legislative base to regulate covered short selling. Yet there is insufficient detail on disclosure provisions, and we know there is industry concern about how they would work in practice. We believe that schedule 3 is an unknown quantity and is just a shell to be fleshed out with a circumvention of the parliament, because all the important detail will be outlined in the regulations.
It would certainly appear to be the case that there is a complete lack of detail in relation to how the disclosure requirements will work. The key issues and concerns of the industry remain unresolved. I say that these matters should be resolved now and dealt with to get it right in the first place. The information is available and the stakeholders have made sensible and realistic contributions. They should not be disregarded—not if the government wants to achieve the desired results. The question should be: why has all this consultation time been wasted with this ineffective and inept schedule 3?
It is a pleasure for me to speak on the Corporations Amendment (Short Selling) Bill 2008. This bill is part of a suite of bills, packages and changes that the government is putting forward to deal with the economic circumstances that we find ourselves in. These dire circumstances are global and need strong, decisive action—which is something we have heard many times in this House but which is true nonetheless. We need a government that is able to respond to evolving global financial circumstances that are largely out of our control. The things that we can control are the things that we should be acting on, and this bill is part of that action.
The bill essentially does three key things. Firstly, it will clarify the ability of the Australian Securities and Investments Commission to regulate short selling. That will put beyond doubt the validity of ASIC’s recent class audit in relation to short selling. That will mean that people will have clarity about ASIC’s role and its ability to regulate in that area. The bill also bans naked short selling. ASIC has the power to grant exemptions from this ban, but it is used in limited circumstances and under special conditions, which I will talk about in a moment. Thirdly, the bill establishes a disclosure regime for covered short sales which are supported by the securities lending arrangements.
The bill aims to do a number of things, but particularly important to all three of its aims is providing clarity, certainty and stability to a market which is under great stress and volatility. You only have to look at market movements today to see the volatility and instability that exist. You have major companies such as Rio Tinto, whose share price fell some 20 or 30 per cent today alone, and you have other companies like Citigroup in the United States, which had a massive fall just weeks ago only to rebound 60 per cent yesterday. So there is this great volatility that exists in the market. The role that we have as a government is to bring about the regulatory framework to give confidence and stability and deal with circumstances as they arise. In certain circumstances, such as those which we find ourselves in now with the global financial crisis, you have to act quickly and decisively—and that is exactly what we are doing.
The first schedule of the bill will amend the Corporations Act to clarify ASIC’s power to regulate short selling. The Corporations Act grants ASIC the general power to omit, modify or vary certain parts of the Corporations Act through declarations. The amendments specify how that is done and how it applies to short selling. The amendments will make it clear that ASIC has the power to do that and to regulate all aspects of short selling, including the prohibition of transactions and imposing or varying requirements on certain transactions. These powers will also extend to transactions with the same or substantially similar market effect as short selling—meaning products and particular instruments that are very much the same as what would be known or described as short selling. I will also briefly discuss those definitions.
The amendments also expressly state that the short-selling declarations made by ASIC earlier this year were within the scope of ASIC’s general power—they were within the scope of powers that currently exist within ASIC. The amendments confirm that the declarations were within the power that ASIC could exercise in certain circumstances. The bill clarifies that. We have done that and supported ASIC because ASIC’s actions were necessary in light of the high levels of volatility not only around the globe but right here in Australia. It is in line with the international regulatory developments occurring in global financial markets at this time. So Australia is not stepping out of current practice in terms of trying to deal with unseen or unheard consequences in this area. These amendments aim to avoid doubt. They provide clarity and certainty and restore as best as possible stability and confidence in the market so that people can understand the circumstances by which short selling could take place, where it is banned and where it is not banned, and perhaps prevent what could be seen by some as market abuses or exploitation of the market, particularly in these very difficult times.
Schedule 2 of the bill amends the Corporations Act to repeal the exemptions that generally allow for naked short selling. These exemptions relate in particular to odd lot transactions, to arbitrage transactions and to transactions where arrangements have been made before the time of the sale that will enable delivery of the product in time for the settlement as well as transactions made under a declaration from the operator of a licensed market in accordance with the operating rules of that particular market. This effectively establishes a prohibition against naked short selling, a short sell where the person does not actually own, has not borrowed or does not in any way hold the securities which they are selling onto the market. There is the power to allow naked short sells if it is considered appropriate, and it is envisaged that ASIC will use this power to allow some non-speculative, naked short selling that is necessary to ensure continuity of ordinary operation of Australian financial markets. So there are circumstances in which it is acceptable.
I am the Chair of the Joint Committee on Corporations and Financial Services and in June of this year the committee brought down rote a report entitled Better shareholders-better company: shareholder engagement and participation in Australia. One of the areas of interest to the committee and of interest to the many people who made submissions to the inquiry was the issue of short selling. It came up in the perspective of being topical at that time in June. It still had not quite hit at that time quite hard enough globally or here in Australia for it to become such an issue that it required immediate government action, although the government was already working on looking at the circumstances in which things such as short selling were adversely impacting on the market and the contributions that that practice makes to the market.
In the committee report we looked at the covered short-selling exercises, which describes the practice where shares that are being traded are borrowed shares and their commissions are paid. It is a not unusual practice and it is a practice that was completely within the right of people to use. It is a practice where, within a certain time, a short seller could repurchase the shares at a lower price than they had borrowed them at and then they could make a profit on the difference or the arbitrage, as it were. Naked short selling differs quite a bit in that it involves someone agreeing to sell a stock that they do not hold. They neither own it nor have borrowed it so have no coverage over that particular stock, which in itself could prove—and did prove in some circumstances—to be problematic for the market.
We saw a number of circumstances where Australian companies as well as international companies were markedly affected and impacted upon by short selling. In normal market circumstances you would not necessarily—and people did not—take a dim view. Short selling was seen as a normal instrument of the market whereby it was used to create liquidity, to allow for good trading and continuation of the market and of specific shares in companies and often worked to the advantage of shareholders, although at times it could work against the interests of shareholders. There had always been some voices who were concerned about the practice, but there were a number of rules regarding how the practice took place.
Times have changed, and that is the bottom line. Circumstances have changed. Global financial markets have changed. We now need to act in a decisive manner to ensure that we restore confidence in the markets. Amongst the findings of the committee—and they were made in consultation with organisations including the Australian Stock Exchange, the ASA, the AICD and a number of other bodies—was the need for proper disclosure and transparency. In the view of some, naked short selling was considered to be a poor practice in itself, and the committee found that the government should look closer at abandoning such practices. Generally speaking, the findings of that committee report are very much in agreeance with the circumstances that we find ourselves in today and the actions that the government is taking. So I am very happy to say that not only did we inquire and report but also we have acted to restore confidence in markets.
Schedule 3, the issue of disclosure, is very important. It is as important if not more important than just the simple banning of naked short selling. The requirement for disclosure in covered short sales is exceptionally important. Covered short sales are sales which are supported by securities obtained under a securities lending agreement, so it is the borrowing of securities that is involved. The amendments that we are proposing require sellers of section 1020B products to advise their executing Australian financial services licensee, the broker, when the sale is a covered short sale—a sale which is supported by some sort of a loan or lease arrangement. In turn, the broker must inform the relevant market operator, and brokers must also report the covered short sales on their own behalf to the relevant market operator. That is to ensure that there is accountability as well as transparency and to ensure that those who monitor the market and those who are in the market and invest in the market have some certainty about who is doing what.
This is one of the big issues that came up in the report of the committee. I note that the member for Fadden, who is also a member of that committee, is here. He also contributed to that report, so I am sure he will have some comments about these particular areas. That disclosure requirement is technically very important and has been the subject of calls from a range of organisations and, in following through from the bill we have in front of us today, puts in place some certainty. The disclosure regime will apply to sales made on a licensed market—for example, the Australian Stock Exchange—and sales that occur through on- or off-market crossings regardless of whether the seller is actually here in Australia or overseas. An important point to note is that it is not going to matter where the seller is. It is going to matter which exchange or market they use, whether they be in Australia or outside Australia. It will be an offence if sellers or brokers do not provide those particulars in the sale of section 1020B products at a time and in a manner that is required by the regulators. That is the appropriate action to be taken.
Regulations will set the mechanisms for disclosure, from sellers to brokers and from brokers to market operators, including when and how disclosure occurs. To complement the disclosure regime, brokers must ask whether the sale is a covered short sale before making the sale. That really gives proper disclosure of the highest standard that we require. It is the appropriate standard. This reflects increasing transparency and accountability in a broader range of areas so that better market knowledge exists and ensures that more timely information is provided to all participants involved in those markets.
In summarising, I make a number of remarks. The first is about the global circumstances in which we find ourselves. These are very unusual and unprecedented times. We can go back in history and look at other times when there has been market volatility: the Great Depression, the end of World War I and World War II, and other times when financial markets around the globe faced particular stress. But I think it is fair to say that here and elsewhere we face unique global circumstances. I read just this morning that the United States is pumping $1.2 trillion into their markets to ensure that there is not a financial collapse of the United States economy. This is a phenomenal amount of money on top of the money that has already been put into their own markets. I think the key point about what that demonstrates is that governments have to take strong and decisive action. That is not unusual action in unusual circumstances.
What the Rudd government is doing here in Australia is exactly that: we are taking strategic, measured efforts in a quiet manner; we are not yelling from the rooftops. We are doing the necessary things to ensure people’s confidence in Australia remains, but also so that the confidence of international markets and other jurisdictions in our economy, our banking system and our markets is maintained. It is part of the broader Economic Security Strategy that we have. It is not merely about the $10.4 billion that we are returning to pensioners, families and carers to give them an economic boost in a downturn just before Christmas to help stimulate the economy and ensure that our economy does not stall or falter. It is more than that. It is about the way we have structured the large deposit bank guarantee, and it will evolve. As each day passes, there are new circumstances that we must deal with. What the Treasurer, Treasury, the regulators and this government are doing is making sure that we strategically and in a measured way step through the very complex and difficult global financial circumstances that we find ourselves in.
You can have many different views on how these things might happen, but the courses of action that we have taken to date are absolutely spot on. They are backed not only by the regulators and Treasury but also by the public. The public actually do understand what we are doing. The public are confident that we are ensuring their safety in these very dangerous times. What we are doing is also being supported by industry and different financial sectors. They, like us, understand that in these very complex and difficult financial times you need to take action. You cannot have a different policy every single day. You cannot change your mind three times a day. You have to not only give the perception of being stable, steady, measured and strategic; you also have to do that through your actions. That is exactly what we have done. I am very confident that we have done everything to date that is necessary. There will be more for us to do. This is only the beginning of a number of strategies and policy and regulatory changes that we may need in the future. The actions that we have taken to date not only give people confidence, security and stability here in Australia, where ordinary families can be certain that their government is looking after their interests—that they are safe—but international markets and other jurisdictions will also understand that they can have confidence in our markets because we have a stable government, with good governance and financial systems in place. I commend the bill to the House. (Time expired)
The Corporations Amendment (Short Selling) Bill 2008 seeks to enhance market stability by outlawing naked short selling and increasing disclosure for covered short sales. The bill gives effect to a number of measures: clarification of ASIC’s powers to regulate and ban short selling of financial products, amendment of the Corporations Act 2001 to prohibit naked short selling, and increasing disclosure requirements. The bill is presented in the form of three schedules. The first two schedules deserve support; the third schedule deserves to be thrown in the bin.
First of all: what is short selling? When individuals invest in shares, they generally want to buy low and sell high. No-one likes to sell things for less than they paid for them—that is, they are purchasing shares for the long haul and are buying long, as any profit will be delivered down the track. Short sellers do the opposite: they want to gain from a fall in price. They are looking for shares they think will go down in price or they are looking to hedge a position against a fall in price. Unlike other share traders, short sellers generally do not own the stock they sell. They sell them hoping that the price will fall below what they purchased them for.
In a conventional short sale, an investor—and large investors are generally large super funds, investment banks or private investment funds; we may know them as hedge funds—takes the view that shares in a particular company may fall, or they wish to hedge a position in a company that may fall. They borrow shares in that company from someone who does own them, and in other cases, called naked short selling, they just sell shares they do not own. If they borrow shares on a covered short sell—most often the owner will be very large pension funds, insurance companies, super funds—the investor sells the shares in the market once the shares have fallen in value and the investor buys them back at the lower price and returns them to the original owner. If all goes well the investor pays less to buy back the shares and pockets the difference. Clearly, there is some cost involved in covered selling.
The current regulation of short selling in both the covered and the naked types is section 1020B of the Corporations Act, which regulates the short selling of certain financial products. Under current provisions, while short selling is technically prohibited, there are exceptions provided in the legislation that allow covered and some naked short selling to occur. These include where the seller has in place before the time of sale an arrangement that will enable delivery of the product within three business days or has effected the sale in accordance with the Australian stock market rules. In both of these cases a person selling through a financial services licensee must tell the licensee that the sale is of this kind. Licensees or brokers who are participants in the financial market operated by ASIC must give ASIC certain aggregated information about such sales on a daily basis.
In response to the global financial crisis, in September 2008 the Australian Securities and Investments Commission, ASIC, responded to turmoil in international and Australian financial markets by introducing measures aimed at limiting the potential for markets to become disorderly. The problem here is that when the ban on short selling was introduced, the market was deferred from an opening of 10 to 11 because the government bungled its advice and the direction it took. Indeed, the Treasurer, our nervous man, had three positions in three days. The member for Oxley has just finished saying that the government got this spot on, that you cannot change your mind three times in three hours, that the market needs certainty—and I agree with him. The market needs certainty. You cannot go around changing your position every second day, but that is exactly what this government did. It put a lack of confidence into the market, so consumer confidence is the lowest it has been since recorded levels, and that was before the crest of the wave of the financial crisis hit us. Indeed, changing the government’s position three times in three days does not imbue anyone with confidence.
The issue of short selling was considered by the Parliamentary Joint Committee on Corporations and Financial Services in June 2008. The member for Oxley, who chairs that committee, was just speaking about it, and I also sit on that committee. Before the stock market crash in September, which sparked governments to temporarily ban or limit short selling, the committee was examining trade practices in equity markets and we remarked that there was a widespread view that short selling activities are not subject to sufficient rigorous disclosure requirements to ensure that shareholders are adequately informed. In our inquiry the disclosure requirements for the practice of short selling attracted considerable attention. The committee reported that in our view:
… while short selling is a legitimate trading tool, it is necessary to ensure it is appropriately disclosed to the market to ensure that undesirable practices that potentially accompany short sales can be identified by regulators. Further, the committee does not oppose institutional investors lending their stocks to maximise returns, but considers that funds should be required to disclose their stock lending practices or policies to members.
We in the committee were concerned about the lack of disclosure, that upwards of five, six and seven per cent of a company’s stock on issue was being borrowed from large funds to short the market and drive the price down. We were concerned that somewhere between 1.7 and two per cent of the market were naked sales—large hedge funds using billions of dollars to short a stock, to force it down and pocket the difference with no thought to the long-term wellbeing of the company or developing productivity out of what the company was doing.
The government has now introduced legislation which contains three schedules. The first schedule inserts new section 1020F(8) into the Corporations Act. The new section clarifies that the power to make a declaration under existing section 1020F(1) can be used to restrict or change the rules relating to short selling on the stock exchange. The purpose of the section is to remove any doubt of the authority to make such declarations under the Corporations Act.
Of particular note is new paragraph 1020F(8)(c), which clarifies that a declaration by ASIC under existing paragraphs can exempt a transaction from the rules against short selling, thereby allowing short selling to occur once a declaration has been made. The coalition supports the implementation of schedule 1 as it is a measure to enhance market transparency by providing certainty to both ASIC and industry regarding the scope of ASIC’s powers. As an aside, I commend the government on moving towards transparency in this schedule. It would be nice if they decided to move towards transparency in other funds in other bills, like the nation-building bill.
Schedule 2 of this bill clarifies that a person can sell products previously purchased under agreement, even though they have not yet acquired the rights to vest the products—that is, due to conditions of the purchase agreement, they have not yet acquired full rights in that regard. The explanatory memorandum makes it clear that the existence of the prior purchase agreement means that the transaction falls short of true naked short selling. The coalition supports the implementation of schedule 2 since such financial transactions—naked short selling—do distort the operation of financial markets by causing increased price volatility. Naked sales can potentially facilitate market manipulation and can damage market confidence. Naked short selling is estimated to represent less than two per cent of all short sales.
Schedule 3 deserves to be thrown soundly in the bin. It attempts to deal with disclosure. It outlines a number of new disclosure requirements for allowable—that is, covered—short sales. The Joint Committee on Corporations and Financial Services looked widely at the issue of disclosure and addressed it in its report in June this year. I can only assume that the government has failed to read the committee’s report. The coalition does not support schedule 3. This amendment is essentially a shell which will be fleshed out without the intervention of the parliament, essentially circumventing the parliament. The complete lack of detail in this schedule not only means that regulations will be relied upon to provide any such detail but also that key issues and concerns for industry stakeholders, who are not in support of this amendment, will remain unresolved.
The government has not done any work on this schedule despite its extensive consultation process. Not only has it not provided any detail but it has also decided not to implement any suggestions or concerns raised. This schedule is inept, it is unclear and it will not lead to the complete disclosure that is needed, and one has to question why the government consults at all if it is going to ignore everything that it is told.
There is a complete lack of detail in relation to how the disclosure requirements will work. This means that key issues and concerns of industry remain unresolved. There are no legislative provisions on how disclosure would take place in terms of time, regularity, whether it is by aggregate or daily totals and what type of stock measure would be used. There are no principles espoused to underpin the disclosure regime; therefore we have no idea at all as to how regulations would be approached or how they are meant to operate.
A lack of transparency arising from this circumvention of parliament removes any capacity for scrutiny and consultation. Surprise, surprise—this government is trying to move away from appropriate scrutiny by the opposition. It allows the government to ignore consultation with key stakeholders and simply table binding regulations in parliament, regardless of consequence and what it does to the market. Key industry groups—including IFSA, FCIA, AFMA and the SDIA—do not agree with the government’s preferred option 2 in the exposure draft. The ASX supports only a modified model of option 2.
There is broad opposition to the disclosure of covered short sales to other brokers as proposed in option 2. Industry advocates that positions should be disclosed to the ASX, as the market operator, and not to other brokers to protect commercial advantage and prevent price distortion. Industry largely has a preference for disclosure of positions one to two weeks after a short sale—not on the following day, as proposed by option 2 of the exposure draft. The government has already held an extensive consultation process but has chosen not to implement suggestions with respect to this. Once again, it begs the question: why bother consulting if you are going to ignore everything you have heard? Treating industry with this degree of contempt is beneath you.
Why rush, if the consultation process has not occurred—particularly where there is a lack of consensus amongst industry groups? Government has invented a deadline but ASIC can continue to regulate short selling indefinitely. There is no need to rush and there is no imperative because ASIC has the power to regulate in the short term. And we know what happens when this government rushes, like when it rushed its bank guarantee. The rest of the world was going with $100,000 to $200,000 caps, but when the Leader of the Opposition proposed a $100,000 cap on 12 October, our Prime Minister—not to be outdone—proposed an unlimited bank guarantee. I think it was the only unlimited one on the planet, bar perhaps Ireland. What we saw was massive market distortion because he rushed. Thirteen of the top 20 cash and property management funds stopped redemptions for six months and 270,000 Australians had their money and assets frozen because this government rushed. There was no need to rush.
In fact, the great irony of this government’s rushing is that this is the only country on the planet where the government’s intervention has made things worse for the nation. Every other nation would appear, on the surface, to be more prudent. They took time and actually had all the regulators in the room when decisions were made, as opposed to just one. They trod carefully and considerately—but not this government. Not wanting to be outdone by the Leader of the Opposition, who had been calling the shots well ahead of the government, they rushed. And they are rushing again now, when there is absolutely no need because of the regulatory powers of ASIC. This is a significant change to the functioning of the Australian equities market. An unsound hastening of the process is concerning and, looking at this government’s track record, it will lead to grief because that is all this government has given in response to the financial crisis for this country. This is the only country on the planet where things are worse because of government intervention.
Any further ill-conceived market reforms, such as the bungled bank guarantee, may produce further haemorrhaging in the share market. The coalition supports enhanced market stability, The first two schedules of the bill deserve our support, but the last schedule is highly ambiguous. It is a hollow shell that is designed to circumvent parliament and it deserves to be thrown in the bin, where it truly belongs.
I rise in support of the Corporations Amendment (Short Selling) Bill 2008 and in support of all three schedules of the bill. Clearly, schedule 3 is the schedule that is providing the contention as far as the opposition is concerned. I will come to elements of schedule 3 in a moment, but I would like reflect more generally on some of the comments made by the member for Fadden, who preceded me in this debate. His contribution, in his usual colourful and flowery manner, sought to portray the actions of the Rudd government in responding to the global financial crisis as having made the problem worse—I think that was the sentiment expressed by previous speaker.
Clearly that is not a view that is shared by an overwhelming majority of Australians, who have acknowledged and recognised that the early and decisive action that the government has taken has ensured that Australia has responded not only in a timely fashion but in an appropriate and proportionate way to the massive challenges that we face globally at the moment. It is important to understand the extent of the challenges we face in managing the national economy in what is a very difficult international economic environment. That is particularly important in the implementation of government policy in relation to the bill that is before the House today.
Against the backdrop of the global financial crisis and the credit crunch, we all have increasingly become aware of the significance of what commenced with difficulties in the subprime mortgage market in the US just over a year ago. We have all become familiar with the reverberations that have extended to shores as far afield as ours here in Australia. We have seen tremendous uncertainty in the global economy. We have seen massive tightening in credit markets. The credit crunch, combined with the other aspects of the global financial crisis, has ensured that the challenges that we face in managing the economy have been amplified.
In recent times we have seen our share markets cop an absolute battering. That is something that, right across this country, people have taken great interest in observing, whether it be self-funded retirees who are seeing those declines in share values on our stock market whittle away the hard earned savings that they have put aside to fund their own retirement or whether it be those whose employment is affected by the impact of what we are seeing on share markets right across the globe. Clearly the factors at play here are global in their nature. The responses can be national and inevitably will be, but we need to be responding in an international way. That is why the efforts of the Prime Minister, the Treasurer and this government in working cooperatively with countries right across the globe have been an important part of our response to the global financial crisis.
In net terms we have seen US equity prices fall by around 30 per cent since the Lehman Brothers collapse, which was only back on 15 September 2008. Over that same period the Australian market has been down by 25 per cent. So clearly there has been considerable difficulty faced not just in our share market but in share markets right across the globe. If you take Australian shares from their 2007 peak, the US Standard and Poor’s 500 index is down by around 40 per cent and Australia’s ASX 200 index is down by almost 50 per cent. The position is not a particularly optimistic one and it is not one that has been observed with any great relish by anyone throughout the community, but it is important to understand and recognise that this is the background to the proposals being brought forward.
The proposals in this bill deal with the practice of short selling. As previous speakers to this debate have commented, short selling of its nature is not necessarily a problem, although there have been examples of the way in which these practices have been employed that have added to the volatility in the marketplace and contributed at least in part—it is always difficult to determine the extent of the contribution—to the fall in share prices, particularly in relation to certain stocks as opposed to some others. This has obviously given rise to some scrutiny of the way in which the Corporations Act seeks to deal with these matters and indeed the way in which our regulators are equipped to deal with these matters. Essentially a short sale involves an investor, quite often a hedge fund or an investment bank, forming a view that shares in a particular company are set to fall. The investor then borrows the shares from someone who owns them—often that will be a large pension fund or insurance company—and then the investor sells the shares in the market place. Having done that, the investor then buys the shares back. It would be the investor’s hope to do so at a price lower than what they sold them for, and then they will return them to the original owner.
It is important in the area of short selling to understand and appreciate the distinction between covered short selling and naked short selling. I think it is almost an article of faith that, when you introduce a bit of nudity into the debate, it spices up the discussion. I acknowledge and recognise that the notion of naked short selling has certainly turned a few heads in recent months and has perhaps given this issue—one that might otherwise be particularly dry—something of a more retail flavour. It would have been rather unusual a few months ago to have people visiting me at my mobile office of a weekend talking about short selling, but naked short selling has been getting a pretty good run of late as I get around the community in my mobile office. Largely these issues have been raised with me by self-funded retirees, who, as I stated earlier, are very clearly concerned about the impact that the global financial crisis and the decline in share values on our stock exchange have had on their retirement savings.
The distinction, of course, between covered short selling and naked short selling largely relates to whether or not, prior to entering into the sale, the investor has an arrangement in place whereby they have secured the ability to get their hands on the security that they are seeking to sell. The terminology that we rely upon is that, if they are exercising a covered short sale, they must have a presently exercisable and unconditional right to vest the product in the seller at the time of the sale. So arrangements have to be undertaken or put in place prior to entering into the sale in order to ensure that the seller at least has a pathway towards securing the underlying security that they are promising to sell.
I mentioned earlier that many people have come to talk to me about this at my mobile office. This is one aspect of this particular discussion that does perplex a lot of people. I think that for the layperson it is difficult to understand how this could occur—how someone could enter into a contract to sell a security that they do not own, nor do they necessarily have any secure means by which they can get their hands on that security in order to deliver on the key points of action that are set out in that particular contractual arrangement.
The bill, primarily through schedule 2, seeks to repeal those existing sections in the Corporations Act that allow for naked short sales. I have to say that in keeping with the response of all the regulators—all of those members of the Council of Financial Regulators in this country—ASIC did move very quickly and demonstrate leadership in this area in order to ensure that, at a time when market turbulence was beginning to escalate, they were able to intervene and, through the use of their class orders, to ensure that greater stability and certainty were returned to trading at a time when things could certainly have got out of hand. So I think credit should be given there. I take this opportunity to restate the view that I have put to this House on many occasions: that right across the spectrum of our financial regulators we have some of the finest regulators that can be seen anywhere in the world economy and that the strength of our economy is in no small part a result of the great contribution of our regulators. That is why the government works very closely with those regulators and takes their advice very seriously. It is worth noting that the proposals that are contained in this bill—and in particular I will come shortly to schedule 3—are very much in keeping with the advice that has been provided by the regulators to the government, and that is appropriate. Given the commentary that we have heard from those on the other side on various occasions, I would have thought that they would be prepared to concede that that is a good thing, notwithstanding that we now see that they are determined to oppose schedule 3.
Schedule 1, of course, provides greater clarification and certainty in relation to the powers of ASIC, and specifically the powers that ASIC has to regulate in respect of short selling. That is a matter that I think did require some clarification, and certainly the amendments contained within schedule 1 have the effect of ratifying, if you like, those actions that were previously taken by ASIC in acting swiftly and decisively to put restrictions on short selling at a time when urgent and immediate action needed to be taken. Certainly the effect of schedule 1 will be to avoid any doubt in that respect. Those amendments provide ASIC and the industry with certainty in relation to the scope of the regulator’s powers, specifically in relation to short selling. It is necessary to ensure the effective regulation of short selling in Australia, and I think that that is a given.
I thought it might be timely to comment on some of the comments from third parties in the marketplace in relation to the actions that had been taken by ASIC previously in banning short selling and, indeed, extending that ban. I note the comments of Paul Fiani, managing director of Integrity Asset Management, who was quoted in the Australian on 22 October this year. He supported the extension of the ban back then. He made the following comment:
What’s the point of spending trillions of taxpayers’ money to restore confidence and then let the shorters back in to destroy the confidence?
I think it is important to see these measures in the broader context of the government’s overall strategy to respond to the global financial crisis. The point he makes, I think, is a good one: that we need to ensure that there is certainty and integrity in the way in which our share markets operate at a time when the government is going to great lengths and investing significant amounts of money in trying to provide the fiscal stimulus that the economy needs. It would be counterproductive to allow, through a lack of regulation, activities and practices such as some of the more dangerous examples of short selling to jeopardise and undermine those efforts, so it is certainly good to see that endorsement there from the managing director of Integrity Asset Management.
I note also that these measures in respect of the banning of short selling were welcomed by the Australian Shareholders Association CEO, Stuart Wilson, who in the Australian on 30 September this year expressed his support for the ban, saying:
THE temporary ban on short sales is working so well right now that it is hard to find an argument against adopting it permanently.
… … …
Globally, market watchdogs took action, forcing our hand. For Australia, regulatory docility was not an option.
I do not think that there was ever going to be any suggestion of docility on the part of our regulators, nor is there to be an allegation of that sort levelled against this government. Whilst those on the other side may wish to try and slow down the process of securing passage of this legislation, which will provide that certainty, we on this side are determined to ensure that that certainty is delivered.
I now turn my attention to schedule 3, which is clearly the schedule that has attracted the most criticism. I think the member for Fadden was getting a little bit carried away with himself when he said it should be thrown in the bin. I suggest that perhaps he would want to have a look at it and read it before he makes such a throwaway comment, if I can use that expression. Schedule 3 establishes the disclosure regime in relation to covered short sales. It is a very important and fundamental part of this legislative package that is before the House. In respect of covered short sales—as I indicated before, covered short sales are those supported by securities that are obtained under a legally binding securities lending agreement, so there has to be a means in place that provides the seller of the security with a presently exercisable and unconditional right to vest the product in the seller at the time of the sale—schedule 3 sets out the disclosure regime, or at least the architecture and framework of that regime.
Under the proposed regime, the seller will be required to disclose covered short sales to their broker and the broker will, in turn, be required to disclose this information to the market operator. Brokers who are out there trading on their own behalf will be required to disclose any instances of covered short selling directly to the market operator. The market operator will be obligated to publicly release details relating to this information. It will be an offence if a seller or broker does not disclose details of a covered short sale.
It is important to understand the significance of this particular aspect of schedule 3 and that is that it imposes the penalties. I hear from those on the other side that there is some comfort with allowing the existing temporary regime to continue to apply. But I suggest that those on the other side who scrutinise this amendment and the schedule more closely will have their sense of comfort shattered when they understand and recognise that under the current regime, which is only temporary, there is no effective penalty or enforcement regime in place. That is the big and fundamental difference between what is currently in place and what is proposed in terms of the disclosure regime that is set out in schedule 3.
Every day that we continue to wait, every day that this parliament fails to act and to pass this legislation, this bill, in full will be another day where the regime that is in existence, for all of the good that it has done, will effectively still be a regime operating without the ability to impose any penalties on those who are in breach of the very fundamental principles that are sought to be achieved through that regime. Clearly, this regime that we are proposing will strengthen compliance in respect of the disclosure requirements.
There are many commentators throughout the industry that have supported the government’s position in relation to schedule 3. I note that the Association of Superannuation Funds of Australia, ASFA, have stated that they support the disclosure model as outlined in the bill. They are the peak representative body of all of the APRA regulated superannuation entities and I certainly do not take their view lightly.
I should say that the ASX is on record as acknowledging and supporting the regime set forward in schedule 3 and, of course, the government is acting on the advice of ASIC in this regard. Any regulations that are to be made can be made— (Time expired)
I rise today to support this Corporations Amendment (Short Selling) Bill 2008part of the Rudd government’s response to the global financial crisis. We are living in unprecedented times; historic times where banks have failed around the world, stock markets have crashed, housing prices have declined and countries in Europe and the United States are facing recession. These events that started in global financial markets have moved into the real economy, battering consumer confidence and placing at risk our future economic prosperity. These are unprecedented times and world leaders all across this global community have stated so. President-elect Barack Obama, in Jacksonville, Florida, on 3 November 2008 said:
We are in the middle of the worst economic crisis since the Great Depression. 760,000 workers have lost their jobs this year. Businesses and families can’t get credit. Home values are falling. Pensions are disappearing … It’s getting harder and harder to make the mortgage, or fill up your gas tank, or even keep the electricity on at the end of the month.
He was obviously talking about the United States but leaders in Europe and across the Asia-Pacific region have made similar statements, highlighting the grave risks to their own economies and the world economy from the global financial crisis. Our own Prime Minister Kevin Rudd has said:
… we are waging a war against global recession and global unemployment—and we are determined to deploy every tool at our disposal.
The government will take whatever decisive action is necessary to protect economic growth and jobs for Australians
The Rudd government, like the US President-elect Barack Obama, British Prime Minister Gordon Brown and other world leaders, understand the magnitude of this crisis that we confront and are committed to working together to navigate a way through this global financial crisis. This shared determination to work together to tackle this crisis stands in stark contrast to the words and actions of the Leader of the Opposition, Mr Malcolm Turnbull. We need to remember that the Leader of the Opposition said the global financial crisis was being hyped and accused our Prime Minister, Mr Rudd, of hyping up the crisis.
Mr Deputy Speaker, I rise on a point of order. I appreciate the member for Leichhardt’s grasp of world affairs but this is a very technical bill, and I draw your attention to the fact that he is not actually talking about it.
I thank the member for Calare for his point of order. Quite often there is a wide-ranging debate relating to bills and sometimes relevance does not really mean it is relevant in this place at the particular time. But this is a very specific bill. I remind the member that this is the Corporations Amendment (Short Selling) Bill 2008 and I ask him to bring his comments back to the bill before the House.
It is very clear the opposition does not understand that this bill is very much a part of our response to the global financial crisis. I am sure the gallery understands that this is a global crisis and it is very important in debating these bills to place them within the context not only nationally but internationally and that is what my comments are about.
It is clear that the opposition, rather than focusing on the real challenges ahead and on how we can work together as we are doing internationally to tackle this crisis, is seeking at every step to play politics. That is what the Leader of the Opposition was doing when he accused the Prime Minister of hyping up the global financial crisis. We have Barack Obama, Gordon Brown and leaders all around the world looking to work together on the need for decisive and urgent action to tackle this crisis, and we have the Leader of the Opposition claiming that it is being hyped up. The opposition, rather than focusing on Australia’s national interests, is instead focusing on its short-term political interest.
Australians understand that we are not immune to the impacts of the global financial crisis but we are well placed to weather the storm. Unlike the United States and Europe, our economy is forecast to continue to grow into the future. The recently released Mid-Year Economic and Fiscal Outlook has our economy growing at two per cent. I was pleased to see that the Organisation for Economic Cooperation and Development, the OECD, in its Economic Outlook released last night is reported to expect Australia to be one of only a few developed nations to avoid a recession. It forecasts growth at 1.7 per cent for the next financial year and increasing growth into 2010. The Rudd government has taken and will continue to take early and decisive action to steer the Australian economy through these vicious economic times.
This legislation is further evidence of the Rudd government’s commitment to act to protect the Australian economy. The bill contains three key measures. It clarifies the ability of ASIC to regulate short selling and puts beyond doubt the validity of ASIC’s recent class orders in relation to short selling. Secondly, the bill bans naked short selling, but ASIC has power under the bill to grant exemptions from this ban to make the markets continue to work appropriately. Thirdly, the bill establishes the disclosure regime to covered short sale transactions—short sales supported by securities lending arrangements. These amendments are urgently needed to give certainty to the markets, enhance confidence and provide time for Treasury to commence further detailed consultations with industry on how these regulations will be enacted.
Other nations all around the world have taken action on short selling and put in place temporary bans, as ASIC was required to do, in response to the global financial crisis. There is a long list of countries—to mention just a few: Japan, the United Kingdom, France and Germany—that have taken action to control short selling in response to the global financial crisis. ASIC did so with the support of the Australian government, and we are now bringing in amendments to the law to allow us to continue to do what is appropriate and to act responsibly economically. It is disappointing, then, that the opposition sought to delay the introduction of the bill. The Leader of the Opposition seems determined to play politics at every possible moment through these difficult economic times. The opposition leader continues to seek to undermine the efforts of the Rudd government to steer the nation through these difficult times.
Mr Deputy Speaker, on a point of order on relevance: the member has been speaking for well over five minutes and has yet to refer to the bill. This is not a bill about the opposition.
I have been listening to the member for Leichhardt. He was referring to the three key measures in the bill just a few moments ago. But I would remind the member for Leichhardt to make sure that he keeps his comments contained to the bill before the House.
Thank you, Deputy Speaker. It is important to remember that short-term merchant banker greed created this crisis, and Malcolm Turnbull’s short-term merchant banker politics is not helping the government steer a passage through it. Rather than focus on the national interest, the opposition continues to seek to play politics with critical pieces of legislation like these amendments to the Corporations Act to better regulate short selling. The Leader of the Opposition is consistently inconsistent as he seeks to play politics with every measure the government brings forward. Whether it is on the Rudd government’s measure to protect bank deposits, or on our economic security package to stimulate the economy, or on these short-selling measures—which the Leader of the Opposition has sought to delay, then support, and no doubt will oppose in time—the opposition has taken more positions than the Kama Sutra. When the Australian people are looking to their government to continue to act quickly, decisively and responsibly to protect the Australian economy, we continue not only to battle the global financial crisis but an irresponsible opposition. Double happiness is a Chinese symbol of marriage. Australians do not expect the opposition to be married to our policies, but the Australian community has become tired of the opposition’s short-term politics.
This legislation is important to maintaining continued confidence in our equity and financial markets, yet we have an opposition who wanted to delay this legislation into the new year. The Selection of Bills Committee sent this legislation off to the Senate Standing Committee on Economics and it was to report quickly, this year. Sadly, I understand that coalition senators, rather than act responsibly, sought to delay the report from the economics committee and wanted to push the reporting off to 6 February next year, effectively delaying this legislation. It took the Greens and Independents to come together with the Rudd government senators to ensure that this bill is now before the parliament. I understand the order for the delay came directly from the Leader of the Opposition. This is grossly irresponsible, given the real need for certainty and transparency in our markets to build confidence. Trying to delay this bill is pretty typical of the behaviour we have seen on a whole range of other policy initiatives we have put forward, whether on bank deposits or our economic security package. They say they are going to support it, then the next day they are opposing it and they will do what they can to play politics with it, not in the national interest but their own short-term political interests. We all know the Leader of the Opposition is a former merchant banker, and that the Gordon Gekkos of this world take a short-term view. They will say anything and do anything to make a dollar. Sadly, the Leader—
Mr Deputy Speaker, on a point of order on relevance: this has absolutely nothing to do with a very technical bill about the way short selling operates on the Australian market.
Mr Deputy Speaker, on the point of order: this debate includes context on the bill that is relevant to the financial crisis. We listened to very similar comments from the member for Fadden. I think we should allow the honourable member to conclude his—
I thank the member for Page. I am well aware of her comments and I would reiterate them myself. But I also remind the member for Leichhardt that personal attacks are discouraged in this place. We might reflect on the Speaker’s comments of yesterday at question time, when he referred to the way we treat each other in this House. I think some derogatory comments from time to time in this place do not serve this parliament well; nor do they serve well the people who are making them from time to time.
Thank you, Mr Deputy Speaker. I think it is important in this parliament that we have a transparent debate, and I think it is irresponsible that the Leader of the Opposition sought to delay this bill, which is critical to our response to the global financial crisis. I will not apologise and I will not be silenced when I seek to make those points.
The member for Calare may seek to interrupt me because he does not like the community—those in the gallery and those who may be listening to or reading this speech—to know that the Leader of the Opposition, through Liberal coalition senators, sought to delay this legislation. They sought to delay it until next year, denying the market the confidence and transparency that it needs in relation to short selling.
I think it is very appropriate to reflect on the past experiences that members of parliament bring to this place. I come from an agricultural background and I am very proud of it. The reality is that the Leader of the Opposition comes from a merchant banker background. The reality is that merchant bankers created this financial crisis. Their short-term greed created it and the reality, I think, is that there is a bit of merchant banker in the current Leader of the Opposition, which he has brought to this parliament. He is focused on short-term politics in his responses to much of our—
I think personal reflections, as I stated a few moments ago, do not serve this place well, nor do they serve you, as the member for Leichhardt well. I think those reflections of a personal nature, linking someone’s past to this chamber, are a reflection on a member and do him no credit.
This legislation is urgently needed, and the Leader of the Opposition stands condemned for trying to delay it. Schedule 1 to the bill amends the Corporations Act to clarify ASIC’s power to regulate short selling. The Corporations Act grants ASIC the general power to omit, modify or vary certain parts of the Corporations Act through declarations. These amendments will specify how this general power applies to short selling.
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 transactions. The amendments also expressly state that the short-selling declarations made by ASIC earlier this year were within the scope of ASIC’s general power.
ASIC took action. We supported the regulators. The opposition has not supported the regulators this year. We support them and we are now moving legislation to ensure that that is recognised. These amendments provide both ASIC and industry with certainty over the scope of ASIC’s powers in relation to short selling.
Schedule 2 to the bill amends the Corporations Act to prohibit naked short sale transactions. A naked short sale is a transaction where the seller does not have a presently exercisable and unconditional right to vest the product in the seller at the time of sale. The amendments repeal the existing sections in the Corporations Act that allow for naked short sales.
Various concerns have been expressed in relation to naked short selling. Naked short selling has a higher risk of failure. Effectively, it is people selling shares they do not own. It can distort the market and potentially allow market manipulation. The perceived activity of naked short sellers may damage market confidence, particularly among retail investors. For these reasons the Rudd government is moving to ban naked short selling under the Corporations Act.
However, ASIC has the power to allow naked short sale transactions if it considers it appropriate. It is envisaged that ASIC will use this power to allow some non-speculative naked short selling to ensure the continued ordinary operation of Australian financial markets. We are leaving it to ASIC to manage these exemptions, because, as I said, we have confidence in our regulators. We back our regulators, unlike the opposition, who continue to undermine them and the Australian economy—as they sought to do earlier by delaying this bill.
Schedule 3 of the bill amends the Corporations Act to establish a disclosure regime for covered short sales. We want to improve transparency in the market. Covered short sales are sales supported by securities obtained under a legally binding securities lending agreement. So there is some ownership or some contract in relation to these sales. Under the proposed disclosure regime, a seller will be required to disclose covered short sales to their broker. The broker will in turn be required to disclose this information to the market operator. Brokers trading on their own behalf will be required to disclose covered short sales directly to the market operator. So we are increasing transparency in the market through this legislation. We are banning naked short selling but we are improving transparency when it comes to covered short selling.
It is critically important that we return confidence to the Australian equity and financial markets. These amendments are just another tool in the Rudd government’s comprehensive approach to tackling this global financial crisis. The Rudd government has acted swiftly and decisively in response to this crisis and we will continue to take any measures we deem necessary to protect Australian businesses and working families. We are a responsible government focused on the long-term interest of the nation. I urge the opposition to stop playing short-term politics and get out of the way of the Rudd government, because we are determined to steer this nation through these difficult economic times.
I see in the lead-up to question time that the Leader of the Opposition has come into this House. He sought to delay this legislation. He has had the member for Calare standing up to try to defend him but it was short-term merchant banker greed that got us into this financial crisis, and short-term merchant banker politics is not going to get us out of it. I see the Leader of the Opposition smiling about this, but this is serious legislation. You tried to delay it. You want to play politics with it but we are going to get on with implementing this legislation.
Order! It being 2 pm, the debate is interrupted in accordance with standing order 97. The debate may be resumed at a later hour and, because his contribution seemed very popular, the member for Leichhardt has leave to continue speaking for 30 seconds when the debate is resumed.