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Australian regulator updates short-selling guidelines

The Australian Securities and Investments Commission updated its rules on short selling, including deferred settlement trading and legislative relief for exchange-traded funds.

Under the new short-selling legislative instrument, ETF market makers can make naked short sales in ETFs and managed funds in the course of making a market in units in those funds. This change facilitates market making, which provides liquidity to the market.

A short sale occurs when a person sells a financial product that they do not own in the expectation that they could purchase the product later at a lower price. Covered short sales, or sales made in reliance on an existing securities lending arrangement, are allowed in Australia while naked short sales are prohibited unless there are exemptions from ASIC.

ASIC is also granting legislative relief for conditional and deferred settlement trading that follows an IPO or other public offer. The relief permits trading where the seller's entitlement to products is conditional on standard conditions that the Australian Securities Exchange imposes under its operating rules.

The short-selling instrument will also permit naked short selling in the context of IPO sell-downs where a special purpose firm offers shares to investors before it has a right to buy those shares. The instrument will now also provide an option for firms to nominate to calculate their short positions at the end of trading day where the transaction is booked. Currently, short positions are calculated at 7 p.m. Sydney time.