ASIC should make short selling more attractive by introducing further exemptions to the current regulations, according to the Australian Securities Lending Association (ASLA).
The domestic market has been losing out on revenues from short-selling transactions, as flows have disappeared to less stringent markets in Asia.
"We have seen a drop off in the demand since the ban on short selling in 2008 and that has not necessarily recovered," ASLA chairman Peter Martin said.
ASLA would like to see exemptions to the liquidity test for stocks.
"At the moment, if someone wants to initiate a short position the same requirements apply to a highly liquid name like BHP, which is 15 per cent of the index, as to a small cap, a really illiquid name," Martin said.
"That is something we would like to see an exemption for to encourage the business back into the Australian market."
ASIC lifted the ban on short selling of financial stocks, the last securities for which the ban was still in place, in May 2009.
But since then volumes have remained relatively low, and as a result fund managers have missed out on revenues they used to get from lending out their shares.
"The supply is not the issue - the borrowing demand is low," Martin said.
Overly stringent legislation surrounding securities lending is an important contributor to the low demand, Martin said.
"Australia is not on the same level playing field as the rest of Asia," he said. "Hong Kong, for example, is a market that has benefited because it had less regulatory intervention."
"We don't want Australia to be seen as too hard of a market to transact in," Martin said.
