CANBERRA, Nov 13 (Reuters) - Australia moved to slap a permanent ban on the most controversial form of short-selling on Thursday amid a historic fall in share prices, part of a crackdown that is also targeting hedge funds and credit-rating agencies.
The move is in line with similar bans in several European states, and tighter disclosure rules and a ban on short selling of shares in more than 950 companies in the United States, as policy makers try to limit fallout from the global financial crisis.
Corporate Law Minister Nick Sherry, in unveiling proposed changes to financial regulation, also announced tighter regulation and supervision of credit-ratings agencies which have been accused of failing investors in the global credit crisis.
“Australia will be banning ‘naked’ short selling,” Sherry told reporters in a briefing, referring to a practice whereby investors such as hedge funds sell shares they neither own nor have borrowed in the hope of quickly buying them back at a lower price.
Naked short-selling is considered murkier and more risky than traditional short-selling, where investors borrow the shares they plan to sell. Traditional short-selling is currently subject to a temporary ban, but is due to be lifted in coming weeks.
Australian regulators banned covered and naked short-selling in September in an immediate response to a global market meltdown, but they left the government to make the long-term decisions on these practices.
The government also announced on Thursday tougher disclosure rules on traditional short-selling, a proposal that has angered sections of the finance community which say bans on short-selling only starve the stock market of badly needed liquidity.
Australia’s hedge fund industry said it supported plans to outlaw “naked” short selling and to introduce greater disclosure in covered short selling, but called for regulators to lift a blanket ban on shorting.
“If the ban is lifted on non-financial stocks next week, investors will see better price discovery, deeper markets, closer bid-ask spreads, and over time, less volatility,” Alternative Investment Management Association chairman Kim Ivey said.
Sherry said new laws, to be introduced to parliament later on Thursday, would force brokers to ask their clients if an order was a covered short sale, while market operators would have to publicly disclose short-selling data they received from brokers.
But he said there was no decision yet on the timing of the public disclosure, amid market concerns that immediate disclosure could force traders to reveal investment strategies.
“I am alive to the concern that the data needs to be disclosed in a way that balances transparency with the protection of the intellectual property and other interests of the funds management sector, and this will be taken into consideration,” Sherry said.
Australia’s securities watchdog, the Australian Securities and Investments Commission (ASIC), has said it will lift its ban on covered short-selling of non-financial stocks after Nov. 18 and on covered short selling of financial stocks after Jan. 27.
Sherry said the government would increase supervision of credit ratings agencies, require them to become licensed as financial services providers and to report annually to ASIC.
“It is very important for retail and wholesale investors in Australia that we have robust ratings, and robust research of financial products,” Sherry said, adding that they were important to investor confidence in the financial system.
The Australian stock market has fallen by about 41 percent this year and is trading at around four-year lows. (Editing by Kim Coghill)
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