ASFA submission supports stock lending

The Association of Superannuation Funds of Australia (ASFA) has adopted a conservative position on possible legislative changes aimed at improving transparency surrounding short-selling on the Australian Securities Exchange (ASX), claiming it continues to support superannuation funds being able to stock lend.

In a document formally commenting on an ASX consultation paper on short selling, ASFA chief executive Pauline Vamos said ASFA as a matter of principle supported greater transparency in the reporting of all short sales as well as the enhancement of participants’ recognition and control of the risks inherent in stock lending.

“ASFA would support amendments to the Corporations Act to require reporting of all sales where borrowing takes place in order to meet settlement obligations,” her submission document said.

“That said, ASFA supports funds (and other investors) being able to lend stocks when they consider that it is appropriate to do so on the basis of the risk and return profile of the transaction,” it said.

Looking at specific issues raised by the ASX discussion document, the ASFA response said that the paper had stated there had been relatively little change to the market capitalisation and liquidity tests since their introduction in 1985 and that, accordingly, there had been a de facto easing of the thresholds with the growth in market capitalisations since that time.

“While there may be a case for a less restrictive approach to be taken on the basis of the greater liquidity and efficiency in price discovery this might bring, the possibility of market manipulation and/or settlement failure in regard to the short selling of stocks in companies with relatively low market capitalisation needs to be considered,” it said.

“Therefore, before any action is taken in this regard, further work should be undertaken on whether to amend the market capitalisation and liquidity tests or eliminate them entirely,” the ASFA response said.