The market regulator’s prolonged ban on short selling financial stocks, based on con­cerns that prices could be hit with volatility similar to that experienced by UK financials after a shorting ban was lifted, could further undermine inves­tor confidence and is inap­propriate given the strength of domestic banks, according to the Australian chapter of the Alternative Investment Man­agement Association (AIMA Australia).

The Australian Securities and Investments Commission (ASIC) extended the ban to March 6 in order to examine the situation in the UK and “assess the markets more care­fully to determine the role of short-selling and aggressive or predatory practices” to deter­mine whether Australia would be prone to similar risks if the shorting ban was lifted.

AIMA Australia pre­dicted the extended ban could result only in greater investor uncertainty and was unwar­ranted, given the strength of the Australian banks’ balance sheets relative to those in the UK and America.

Kim Ivey, chair of AIMA, said the ban was an excessive measure of protection for financials, listed property trusts and other specified stocks.

“Local financial institutions are not reporting multi-billion dollar write-downs in their loan and investment portfolios,” Ivey said.

“The banks are not in dire straits, like [those] in the UK and the US, where many banks have become nationalised. And we have a government guaran­tee of deposits.”

Unless the regulator was aware that domestic financial companies faced major write-downs big enough to damage their financial strength, there was scarce justification for a continued ban on short selling, Ivey said.

If any such funding shortfalls were imminent, the market-sensitive information warranted immediate disclo­sure to the market, he added.

ASIC has provided exemptions for investors to participate in certain forms of short selling, such as specified over-the-counter transactions with investment banks and exercising shorts in the options market.

But in some cases, Ivey said, the implied volatility of buying put options of financial stocks had surged ahead of their historical averages in the months that the ban has been in place, increasing their prices.

“Because share prices are more volatile, market-makers are finding it harder to hedge, and have raised their prices for options.”

The hedge fund sector criticised the duration of the ban, stating that short selling is never the only determinant of share prices and its influence is often exaggerated – particu­larly as macroeconomic condi­tions deteriorate worldwide – and that it significantly reduced trading volumes and liquidity.

However, in a statement, AIMA Australia supported ASIC’s investigations into in­vestors who combine “rumour mongering” and short selling to mislead the market, but did not see the ban as a panacea that could stop this behaviour.

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