Plans for either Sydney or Melbourne to become a regional financial services centre to challenge the likes of Hong Kong and Singapore may have to be put on hold, as local fund managers have said that the Australian Securities and Investment Commission’s decision to ban all short selling for thirty days from September 21 will discourage foreign investors.
The move by ASIC has made Australia “the most regulated market in the world”, according to Tom Elliot, managing director at hedge fund MM&E Capital. The chair of the Alternative Investment Management Association, Kim Ivey, said even the temporary shorting ban would fundamentally undermine the Australian financial system. “We’re concerned that, without any short selling , price discovery for many ASX stocks is actually in disequilibrium and as a consequence, many stocks will exhibit increased volatility,” he said.
“We can expect severe outcomes from this short selling ban – investors who want to adopt capital protection strategies either through short selling or through derivative instruments such as CFDs are unable to do so. ‘ Even after ASIC tweaked the ban to allow such things as companies underwriting dividend reinvestment plans, Ivey was critical of the added convolution but grateful the extra exemptions were only temporary.
In particular, he said AIMA Australia was in discussions with ASIC about the allowances that it had given to investment banks which allows them to short sell for market making activities. “Having locked out everyone else to short sellling, our concern is how ASIC will monitor and ensure that investment banks are only undertaking short selling for market making purposes and not being executed in their significant proprietary trading activities,” Ivey said.
ASIC’s snap decision to blanket-ban shorting came after the US, UK and European regulators banned short selling on mainly financial stocks. On the same day as ASIC made its announcement, Taiwan said it would ban short selling on 150 of its largest companies, while the Dutch banned naked short selling for three months. For its part, the Australian Institute of Superannuation Trustees said it had never supported naked short selling, and that super funds “are not active in this area…AIST has long called for better disclosure in short-selling and we hope this will be one of the positive outcomes of the current ban.” ASIC’s argument for the ban was that the Australian market was too small to risk exposing itself to the attentions of global hedge fund mangers, now prevented from shorting in other markets.
But MM&E’s Tom Elliot said that a regulator that intervenes as suddenly and heavy-handedly as ASIC had done was a deterrent for foreign investors. “People will not want to invest here,” he said. “It undermines the idea of a free market. I don’t think they [ASIC] have thought through all the implications.” Dominic McCormick, chief investment officer at Select Asset Management agrees: “I think the decision will have a lot of unintended consequences,” he said. “It sends the wrong message to foreign investors. It says Australian companies are weak and need help. Good companies have nothing to fear from short selling.”
McCormick said the argument that short sellers would focus on Australia if it didn’t follow bans in the US and UK was “pretty speculative”, and he did not think it was the job of the regulator to be “second guessing”. Elliot said assuming Australia would be targeted if it were the only market not to ban short selling was “a spurious piece of logic”.
Standard & Poor’s placed its rating for the Select Alternatives fund, a diversified multi-strategy fund, on hold the day following the announcement. McCormick said that if, as indicated, the ban was only temporary, its affect on the performance of most funds would be largely immaterial. But there was a chance that it could spook investors. “A knee-jerk reaction from investors to pull out of funds that do short selling would be irrational, but in the current market, anything seems possible,” he said. “Banning short selling introduces another element of risk into an already risky environment. It doesn’t make sense at this time to reduce investors’ access to hedging.”
A doyen of Australia’s hedge fund industry, Damien Hatfield, said the temporary blanket ban on shorting was a “massive retrograde step”, the lack of industry consultation was “outrageous”, and that global investors would be repelled by the “kneejerk reaction” of the regulator.