The draft Corporations Amendment (Short Selling) Bill was released by the Minister for Superannuation and Corporate Law, Nick Sherry, last week, and is open for public comment until 21 October.

However details of exactly what information will need to be disclosed has been left to the regulations, which — at the time of writing — were yet to be released. Deacons partner James Stewart explained: “The legislation is very vague in that it says that you must disclose the information set out in the regulations. This is intended to provide flexibility so that the disclosure requirements can be easily amended to adapt to future market developments.

“We expect the regulations will, at least initially, require the disclosure of covered short sales in the same way that ASIC was proposing.”

Stewart believes that introducing a disclosure requirement is a positive step that brings some transparency to the market. “At least then people will be able to see if the selling that’s happening is by people who are short selling and who have an interest in the share price dropping,” he said.

The release of the draft legislation follows the recent decision by ASIC to temporarily ban all naked and covered short selling on Australian financial markets — subject to some limited exceptions such as market makers and dual listed companies. Similar bans have been introduced in financial markets throughout the world — though not all to the same extent as in Australia — following speculation that hedge funds were using short sales to drive down the price of particular stocks.

“Because the rest of the world had banned short selling to various degrees, there was concern that [hedge funds] would have nowhere to go, so they would all come to Australia and target Australian companies,” Stewart explained.

According to an update released by Deacons, a potential concern with the wording of the class order banning covered short sales is that brokers may potentially be liable for prohibited short selling activities by their clients, whether or not they actually knew that the sale was short.

The update suggests that the effectof the class order is broader than what may have been intended, but at the time of writing it had not been amended.

ASIC has said it will reassess the ban on short selling towards the end of October, 30 days after it was put into place.