Australia’s Markets Stronger For GFC

By Greg Yanco
The Australian Securities and Investments Commission (ASIC), as the nation’s capital markets regulator, is looking at how it needs to integrate the experience of the Global Financial Crisis (GFC) into its future policy settings, writes ASIC’s Greg Yanco.
So far, Australia has fared better in the financial crisis than most other countries, in terms of both its economy and financial markets. Our banks have not required the degree of Government support provided overseas and our stock market has been an impressive source of equity capital raising for listed companies.
Australia’s current approach to financial regulation and its underlying philosophy emanates from two major inquiries into deregulation. The Wallis and Campbell inquiries emphasised competition, efficiency, neutrality, integrity and fairness, as well as financial stability and prudence as key policy principles for financial regulation.
The aim was to lower the cost of capital and increase the availability of funding sources, and provide the basis for increasing Australia’s sustainable economic growth rate. The means of achieving this aim was allowing markets to work and participants to decide on investments in their own best interests after suitable disclosure. Regulatory intervention was focused on correcting market failure.
This was embodied in the ‘twin peaks’ model of regulation between the Australian Prudential Regulation Authority (APRA) which regulates deposit taking institutions that the Government believes are sufficiently systematically important as to have their business models prudentially regulated and ASIC, which regulates securities and investments guided by the principles flowing from the Wallis and Campbell inquiries and reflected in the Corporations Act.
The Corporations Act sets out rules around disclosure and preventing market abuse, but does not intervene in business models or risk.
Doing its job
ASIC is acting decisively in exercising its powers to regulate market conduct and disclosure as part of its work to rebuild and maintain confidence in the integrity of our markets.
One of the ways we are doing this is through our work on short selling. The practice of short selling rose to increased prominence internationally last year.
Around September, during a period of heightened turbulence in world financial markets, ASIC took steps to require disclosure of gross short sales. This was in the context of concern as to the spreading of false rumours driving prices down to the benefit of short sellers. Shortly afterwards, following international developments including the banning of the practice for a period by a number of countries, including Australia, the UK and the US, we foreshadowed how disclosure rules would be an ongoing requirement once the ban was lifted.
The disclosure regime introduced by ASIC placed a positive obligation on brokers to ask their clients if a sale was short. One of the means of recording this information was the FIX protocol and, with the help of the FPL Asia Pacific Regional Committee and major brokers, we agreed messaging standards and protocols. The FIX Protocol tag 54 values were amended for the Australian market, to identify a long sale, a covered short sale and a covered short sale exempt. Gross Short Sales are reported to the ASX and disclosed to the market. This helps provide additional transparency on the amount of short selling in Australian securities.
Regulations lead the way
The Australian Government has now finalised regulations that will govern short selling on a permanent basis.
The regulations effectively replicate the existing requirements for gross reporting of short sales as under the current regime introduced by ASIC. In addition, the legislation will require short sellers to report their net short positions to ASIC within 3 business days of those positions being taken. ASIC will introduce, by way of a class order, a threshold so the net reporting obligation does not apply to small short positions. The short seller continues to report their short position each day until their position falls below the threshold. ASIC will publish the total short positions for each product on the day after receiving this information. The net reporting requirement is expected to take effect from 1 April 2010.
Disclosure is fundamental to these new regulations and ASIC is undertaking work with stakeholders to ensure the practical aspects of the new regime strike the right balance between regulation and efficiency.
One way we are seeking to strike this balance is to use the FIX protocol for reporting under the new regime. One of the reasons we chose FIX was the ease in which we were able to implement changes using FIX during the short selling ban.
We also wanted to minimise the reporting burden of market participants by using a messaging protocol that was already widely accepted. This means that while there will be additional reporting required, at least it can be done through existing and established market infrastructure and be communicated in an internationally recognised format.
The task of implementing the net reporting requirement by 1 April 2010 is nonetheless quite large and involves a number of facets ranging from changes to policies and procedures on trading room floors through to information communications technology considerations and modifications.
To assist us in adapting the FIX protocol to meet the new requirements, ASIC has retained FIX expert, John Cameron. John will assist us with vendor relationships, design issues and the implementation of a streamlined client interface.