29 July, 2012
Legal News & Analysis – Asia Pacific – Australia – Regulatory & Compliance
In brief
- A new ASIC market integrity rule will affect the short sale reporting requirements for ASX and Chi-X market participants.
- Instead of providing aggregated data on short sales by the next trading day, market participants will be required to report on short sales to the market operator in real time ("Short Sale Tagging"). The Short Sale Tagging obligation will require market participants to specify, at the time an order is placed, the quantity of a sell order that is a short sale.
- To allow market participants the time to make the necessary changes to their systems and procedures, market participants will not need to comply with the new rules until 10 March 2014.
Background
The ASIC Market Integrity Rules (ASX Market) 2010 and the ASIC Market Integrity Rules (Chi-X Australia Market) 2011 have been amended to impose obligations on market participants that short-sell section 1020B products (as defined in the Corporations Act). New Rule 5.12.1 requires market participants to specify the quantity of a sell order that is short at the time the sale order is placed. In the case of an off-market transaction that is reportable to ASX or Chi-X, new Rule 5.12.1 requires the participant to report the quantity of the off-market trade that is short at the time the trade is reported.
ASIC has previously consulted on its proposal to introduce Short Sale Tagging through ASIC Consultation Paper 145 Australian equity market structure: Proposals; discussions with the industry advisory group to ASIC and, more recently, meetings with at least 10 market participants, the Australian Financial Markets Association, and the Stockbrokers Association of Australia.
For the purposes of these new rules a sale is a short sale where the sale is to be covered all or in part under a securities lending arrangement. An obligation to tag short sales at the time an order is entered into the market is not a new concept; when naked short selling was permitted in certain approved ASX quoted securities under the Corporations Act and the former ASX Market Rule 19, participants were required to tag the order at the time the order was entered into the market.
Changes to current practice
Currently, market participants are required to report information on short sales at or before 9 am on the next trading day. ASIC understands that market participants manually record the number of products that they short sell for each transaction and aggregate this number at the end of each trading day. The daily volume of short sales by product is then sent to the market operator.
ASIC considers that the current arrangements are time consuming, incompatible with some market participants' systems (ie those that use algorithmic trading), and only provide the operator and ASIC with aggregate information, which is of limited use.
The new Short Sale Tagging requirements are aimed at enabling:
- the efficient collection of transactional (rather than aggregated) short selling information from ASX and Chi-X market participants; and
- the accurate and timely dissemination of short selling information to ASIC and the market. ASIC expects to be able to use this information as an audit trail to ascertain which parties are making short sales in the market.
ASIC has stated that it, or a third party, would produce a single report of aggregated short selling activity by product, which would continue to be made public the following day.
Implementation
The Short Sale Tagging requirements will rely on information technology systems to manage short sale orders in a particular manner. However ASIC does not propose to prescribe specific IT systems that market participants use to comply. ASIC's industry consultation found that the costs of implementing the required modifications for real-time tagging would range between $80,000 and $2 million for the larger market participants that already had automated trading platforms. However, some of the 80 smaller market participants would need to implement substantial modifications to their order management systems, which may ultimately be provided by external parties.
Clients are required under the existing rules to notify a market participant, at the time they place a sell order, the extent (if any) to which the order will result in a short sale if executed (section 1020AB of the Corporations Act). Participants will be able to rely on such disclosure in order to determine the extent (if any) to which a sale order needs to be tagged as short when the order is entered into the market.
Market participants will also continue to be required to provide short sale transaction reports to ASX or Chi-X by 9.00am following the trading day on the short sales were executed (section 1020AC of the Corporations Act). Such sales are discussed in ASIC RG 196.87 – 93 which was last updated in April 2011.
Examples of how transactions should be tagged
The table below illustrates some examples of how ASIC expects certain short sale transactions to be identified once the Short Sale Tagging requirements commence.
| Type of sale | Requirements |
| Sale by client trading account | The quantity of sale that is short should be identified. |
| Sale by proprietary trading account | A sale of a security by a proprietary trading account at a market participant should be identified as a short sale if the seller intends to settle the sale using securities 'borrowed' under the terms of a securities lending arrangement. A sale of a security by a proprietary trading account at a market participant should be identified as a long sale if the seller intends to settle the sale using securities 'borrowed' from other proprietary inventory of the market participant. |
| Sale during client facilitation trade | The quantity of sale that is short should be identified. |
| Sale during market making for hedging purposes | Exempt by Class Order [CO 10/288] Covered short sale transaction reporting relief for market makers. This relief also applies to market makers of an exchange-traded fund. |
| Algorithmic trading | The quantity of sale that is short should be identified. |
| Sale via exercise of option | Exempt by Class Order [CO 10/289] Variation of Class Orders [CO 08/764], [CO 09/774] and [CO 10/29]. |
| Sale that is part short | The quantity of sale that is short should be identified. |
| Combination trade | The quantity of sale that is short should be identified. |
| Errors or incorrect tag | No adjustment required. |
| Special crossings where either the selling client is part long and part short, or where the selling side is amalgamated and one or more of the sellers is long and one or more of the sellers is short | The quantity of sale that is short should be identified. |
| Change in position of sell order from short to long while sitting in the market | No adjustment required. Note: Disclosure is based on the position at the time the seller enters into an agreement to sell: reg 7.9.100(2)(a). |
| Sale by an individual account within a market participant where the individual account is short in the security sold but the market participant is long overall in this security |
The quantity of sale that the individual account is short at
the trader enters into an agreement to sell should be identified. Note: Disclosure is based on the position at the time the seller enters into an agreement to sell: reg 7.9.100(2)(a).
|
Transitional arrangements
To allow market participants the time to make the necessary changes to their systems and procedures, market participants will not need to comply with the new rules until 10 March 2014. ASIC proposes to issue further guidance prior to that date.
