Australia extends ban on short selling of financial stocks

Thursday 5th March 2009

Australia extended a ban on short selling of financial stocks for at least two months, citing continued volatility in global financial markets.

The Australian Securities and Investments Commission extended the ban until May 31 saying that any loss of market efficiency or price discovery was an acceptable price to pay for insurance against the effects of shorting financials.

"ASIC has decided to continue with its cautious approach and keep the ban in place," the regulator said in a statement posted on its website. "Its judgment continues to be that any possible loss of market efficiency or price discovery as a result of the continuation of the ban is justified given the current market circumstances."

Shorting a stock is a bet that it will decline. The trader borrows the shares to sell and buys them back at a lower price, pocketing the difference. The ban on shorting financials was introduced in September and had been due to expire tomorrow. It follows measures taken in the US and the UKto curb the potential damage from "aggressive or predatory practices from short selling."

The S&P/ASX 200 Financials Index, which includes Australia's major banks, has declined 12% in the past month, worse than the broader S&P/ASX 200 Index's 8.3% slide. So far this year, National Australia Bank has charted the steepest decline among the four biggest banks, sliding 17%, while ANZ Bank has fallen 15%, Westpac 5.3% and Commonwealth Bank 2.1%.

The banks have lobbied ASIC to extend the ban amid fears hedge funds are preparing to bet on a decline in their shares, according to the Sydney Morning Herald.

ASIC lifted a bank of short selling of non-financial stocks on November 13. It continues to enforce a ban on so-called naked short selling, where a trader sells a stock short without first borrowing the shares or arranging to do so within a set time.

Naked short selling is also prohibited in the US because of its potential to manipulate prices though some regulators contend the practice still exists.

By Jonathan Underhill

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