Margin lending and short selling under the microscope

Corporate regulators sought to allay investor fears by issuing statements re-stating disclosure obligations for short selling and stock lending transactions.

In response to the widespread perception that undisclosed shorting and margin lending transactions are one of the causes of the current sharemarket volatility, the Australian Securities and Investments Commission and the Australian Stock Exchange jointly released three statements re-stating the legal requirements of these transactions.

Not long after the statements were released, Federal Treasurer Wayne Swan said the Government was considering legislative options to force traders to keep the market better informed.

The ASX acknowledged, in the statement, that its shorting rules are not being interpreted consistently, leading to some understatement of the extent of shorting in the market.

The ASX market rules require parties of a short sale to inform the market when it is executed, to settle the transaction within strict timeframes, and to only short securities on an approved list.

ASIC’s statement reminded the market that acquiring large numbers of securities as part of a stock lending arrangement will oblige parties to the transaction to disclose this to the company and the market as a “relevant interest”.

It states that if the acquisition of securities in listed entity is large enough, the substantial shareholding takeovers and provisions of the law may be activated, giving rise to a number of disclosure and compliance obligations.

The obligation to disclose a substantial shareholding arises when the holding is as little as 5% of a listed entity or registered scheme, and the takeover provisions at 20%.

The ASIC statement also said anyone found to have deliberately spread false or misleading information about a listed security could face five years in jail and a fine of up to $220,000.

The release of these statements follows a joint statement issued last week on finance arrangements and margin loans for listed companies.